London-based hedge fund management firm SilverStreet Capital, which was established in April 2007 by Gary Vaughan-Smith and Alex Da Costa with USD5
London-based hedge fund management firm SilverStreet Capital, which was established in April 2007 by Gary Vaughan-Smith and Alex Da Costa with USD500m in assets under management, is looking to take advantage of expected consolidation in the marketplace to accelerate its growth with the acquisition of fund of hedge funds businesses.
“We anticipate that there will be consolidation in the hedge fund industry as a result of the ongoing issues in the financial markets and the need for funds to deleverage and meet redemptions,” says Vaughan-Smith, SilverStreet’s chief executive. “With our flagship fund holding up relative to the peer group, we are in a strong position to act as a consolidator and further develop our business.”
The firm’s flagship multistrategy fund, SilverStreet Leaders, has lost 3.3 per cent since its launch in June, compared with an average decline of 9.6 per cent for the fund of funds sector overall, according to HFR.
“There are more than 2,000 funds of hedge funds managed by around 500 different firms,” Vaughan-Smith says. “We are expecting a withdrawal of around 30 per cent of the money from hedge funds, including funds of funds. Within the fund of hedge funds universe there’s quite a long tail of smaller fund of funds managers, so the number of managers might go from 500 to 350 or 400.”
He argues that the better performers that succeed in protecting their clients’ capital through the turbulence will be well placed to win investment from their less successful peers and consolidate their own asset base.
“There are a lot of funds of funds with USD100m to USD200m under management, and if they have any redemptions it will put stress on the business, but those that make it through the crisis this year and protected their clients’ capital better than others will see increasing flows,” Vaughan-Smith says. “Those that have underperformed will see redemptions from clients. For instance, we are hearing that a lot Swiss clients are redeeming. They weren’t expecting to actually lose money.”
He says SilverStreet’s relative outperformance is largely down to a combination of manager selection and strategy allocation, and a conscious effort to avoid problem areas such as less liquid strategies, as well as larger funds.
“Over the year we’ve increased allocations to smaller funds that are a bit more nimble in the current environment, lowered beta and had slightly more emphasis on faster-trading strategies with shorter time horizons,” Vaughan-Smith says. “At a strategy level we’ve had a very low allocation all year to arbitrage-type strategies, which is where a lot of the problems are. We started moving in that direction toward the end of last year following the peak of the equity markets at the end of October.”
