I recently had the opportunity to sit down with David Cohen, who is both the president of Karlin Asset Management, which he founded in 2005, and the co-founder of Karlin Real Estate. Cohen has over 20 years of experience in principal investing, real estate, private equity, mergers and acquisitions and capital markets. Karlin Asset Management, which manages more than $1 billion for one primary client, exemplifies the type of expertise that's in high demand by large single-family offices. In the following interview, Cohen describes the firm's investment philosophy and how it was able to succeed during one of the most volatile financial periods in the nation's history.
Prince: Can you tell us about Karlin Asset Management?

Cohen: We're a Los Angeles-based $1 billion-plus family investing office. Our principal's original wealth was generated from the sale of a medical device intellectual property portfolio.

We like to say, "We buy value and control risk." More specifically, our mission is to opportunistically pursue superior long-term, risk-adjusted returns. This often leads us to execute contrarian and value-oriented views and investment themes. These themes are based on a strategic asset allocation, coupled with tactical overlays, where investment ideas and themes are expressed through a combination of direct investing in securities and assets, and employing outside managers.

People describe us as operating more like an institution than a family office. And I think that's right. We operate as an opportunistic investment management business. We have clearly defined functional investment areas such as securities analysis and selection, risk management and tactical hedging, asset allocation, outside manager selection and monitoring as well as direct investments in distressed real estate, lending and timber. What separates us from many other investors is the patient, stable, long-term nature of our capital. This allows us to take a highly flexible approach; we can play in many different securities, markets and asset classes.

And while I and most members of our team were trained on Wall Street, and bring that financial sophistication and rigor to Karlin, we also benefit from being based on the West Coast. First, some distance from Wall Street liberates us from the pack and allows us to think and act pretty independently. Second, we really believe that the same type of influences that make California such an entrepreneurial hotbed also drive the creative imagination that underlies our investment activities. 

Prince: How do you approach family office money management?

Cohen: It's interesting. The world labels us as a "family office" because we are in terms of managing the wealth of one private investor, but we don't think of ourselves as one, at least in terms of how most people perceive family offices.  We are really a money management shop with one stable client.  We are an active investment fund, don't manage the family office services of the principal, have institutional coverage from the Street, have short positions and hedges, and are global in our thinking and investing.

First and foremost, we are value-oriented, which just fits with my lifelong investment constitution. We have analysts with broad generalist, as well as sector-specific, experience, which is a good fit for our value focus. Then we leverage our experience, an awful lot of hard work and study, and a broad network of relationships to identify investment themes and new ideas. We pursue asymmetrical risk/reward scenarios, and we use every ounce of our creativity to discover ways to create value. We are always on the lookout for market displacements and contrarian opportunities. And as I mentioned, I have found that being 2,500 miles away from Wall Street-where most of us first earned our investing stripes-is helpful; we feel we can pursue more creative constructs and be more independent in our thinking.

For execution and management of our investments, we rely primarily on our own internal capabilities, strategically complemented with world-class outside managers.  And we maintain a fundamental, rigorous focus on risk controls across our portfolio. We monitor correlations, concentrations, and transparency risks, among others, and we'll hedge where appropriate. We really focus hard on counterparty risk, custody providers and arrangements, and our prime broker relationships. There are many institutional investors that wish they had done the same in the 2008-2009 collapse. We also are constantly seeking to optimize our tax position, but not allow it to drive our investment process. The "quants" refer to it as being "tax aware."

I should also mention that, from the beginning, we always tried to "wrestle above our weight class." We sought out and insisted on working with premier, "top-drawer" banks, prime brokers, global custodians, attorneys, accountants and consultants before we really had the girth, track record and reputation to deserve some of those relationships. They have been critical to our success. Finally, as I mentioned, we are fortunate to be working with patient capital and fully supported in our long-term focus.    

Prince: What did you do before running Karlin?

Cohen: I have spent my entire 20-plus-year career in investing and finance, first as a Wall Street investment banker and derivatives specialist at Lazard Frères, and then in a role similar to my current one for another Forbes 400 member for almost a decade. Prior to that, I received my undergraduate degree in engineering and master's degree in finance, so I always like to understand quantitative inputs and problem solving.

Prince: Where do you see the family office model evolving to?

Cohen: I have been doing this-managing the portfolios of ultra-wealthy individuals-in one form or another for most of my career.  I've seen a dramatic change in the last few years as more and more successful families have become disenchanted with both the traditional outsourced private banking model and the performance of their portfolios. 

There is a growing movement to bring in Wall Street-trained talent to properly handle money management and risk controls, and to take a much more active investment role. In other words, large family offices are beginning to be run like institutional-quality businesses under the management of experienced financial professionals. Frankly, my response is, "What took so long?" The era of passive management or, in many cases, poor-quality active management-often by the principal, or the principal's lawyer, accounting firm and other wealth advisors with all of their inherent conflicts of interest-while not over, is slowly fading away.