Gary Vaughan-Smith and Alex Da Costa, the former ABN Amro Asset Management alternatives specialists who have launched new London-based fund of hedge fund manager SilverStreet Capital, say they are targeting top performance rather than trying to build a big operation.
SilverStreet, which received approval from the Financial Services Authority at the beginning of April, currently has three staff and the partners expect the workforce to grow to around 10 over the next 12 months. 'However, I don't think we'll ever be as many as 50,' he says.
The firm has launched operations with a mandate of more than USD500m from a leading European institutional investor. 'As a start-up we're quite unusual in terms of our size, having more than USD500m from day one,' Vaughan-Smith says.
But he insists that SilverStreet will not be chasing growth. 'We are dedicated to achieving excellent returns, and we are not into asset-gathering for its own sake,' he says. 'We are not distribution-led.'
Both Vaughan-Smith and Da Costa come from an institutional asset management background and the new firm will have a similar focus. 'Our business is very institutionally oriented. We see a lot of the flows coming now from institutions rather than the high net worth area. Scandinavia, the Netherlands, Switzerland and the UK are the key markets.'
Vaughan-Smith notes that UK local authorities are now allocating increasingly large amounts to hedge funds, while the sector also stands to benefit greatly from changes in the FSA's admissible assets regime for life assurance companies, which now are able to count offshore hedge fund investments toward their statutory solvency requirements.
'That's enormous, when you think that the life industry here is GBP1trn in size, roughly the same size as the pension industry,' he says. 'We've heard that the Pru are thinking about it, as well as Pearl's closed fund.'
He acknowledges that it is hard for a fund of hedge funds to distinguish itself from the existing 500 funds of funds worldwide, but says: 'We believe we are much more forward-looking than the most funds of funds in our investment approach.
'We focus on picking tomorrow's winners, rather than throwing money at the same managers as other funds of hedge funds. In addition, if you step back from the herd, capacity isn't an issue, although there are also outstanding managers who are big and whom we would invest with.'
Under the initial mandate, which is targeting annual returns of Libor plus 500bps with volatility of 4 to 5 per cent, SilverStreet will invest with between 25 and 30 underlying managers.
Vaughan-Smith says the firm plans to launch a Luxembourg-based fund of funds vehicle, probably in July. The fund, which will be aimed at smaller institutional investors, is likely to be more focused, with fewer than 20 managers.
Vaughan-Smith was head of the alternative investment group at ABN Amro, where he oversaw growth in its assets under management from USD45m when he joined in 2001 to around USD5.5bn when he and Da Costa left last summer.
He had earlier spent just over a decade at Gartmore, starting as head of the quantitative investment and risk consultancy teams and in 1998 becoming head of the global portfolio team with USD26bn in assets. Da Costa, who was head of portfolio construction at ABN Amro, began his career in the industry as a fund of funds manager with Vector Asset Management.