The Silver Creek Low Volatility Fund produced annualized returns from its inception on July 1, 1994, through Sept. 30, 2009, of 7.2%; performance in the first three quarters was 11.96%. By comparison, the HFRI Fund of Funds Weighted Composite index returned an annualized 6.39% for the same 15-year period and 9.75% for the first nine months of this year.
“Many large and smaller institutional investors specifically sought us out for these kinds of investments and they worked very well for the first 14 years of the fund's history. We thought we had a structure that could marry liquid and illiquid private investments in the same fund,” Mr. Dillon said. “The events of 2008 proved that we were wrong.”
Silver Creek has also gated its two smaller hedge funds of funds, the Silver Creek Long/Short Partners fund and the Silver Creek Early Advantage Fund, an emerging hedge fund manager fund, both of which also will be closed over time. Mr. Weeks declined to provide asset totals for either fund.
Mr. Weeks said investors in the long/short equity fund likely will receive about 62% of their assets back by the end of the first quarter next year; he didn't specify when the balance of the assets will be returned. Silver Creek executives just gated the emerging managers' fund of funds and are working out liquidity terms, he said.
Mr. Weeks said 90% of the numerous client meetings he has had conducted in the last six months have been “positive” and he speculated that from 40% to 50% of clients likely will opt for the longer two-year lockup for the Low Volatility fund.
“I know there are clients that are disappointed, but I am not encountering clients that are angry. I think perhaps investors have come to an acceptance that `OK, this is what I own and I have to wait for it to be worked through,' ” Mr. Weeks said.
Institutional investors in the Low Volatility fund and their investment management consultants declined to give their reaction to Silver Creek's restructuring plan.
For example, $2.2 billion San Antonio Fire & Police Pension Fund terminated Silver Creek in February, according to minutes from a Feb. 17 investment committee meeting, but has not been able to get its $30 million investment back because the Low Volatility fund is gated. The investment committee discussed the Silver Creek restructuring options at its Sept. 22 meeting, according to agenda materials posted on the fund's website. Minutes from the September meeting are not yet available and Warren J. Schott, executive director and chief investment officer, did not return calls seeking comment.
Other investors in Silver Creek Low Volatility fund who declined to comment about their restructuring choice include Thijs Steger, spokesman for the €173 billion ($256 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands, and Norman Schofield, chairman of PA Pensions Trustees Ltd., which manages the £410 million ($655 million) PA Consulting Group Pension Scheme, London. The size of each fund's Silver Creek investment could not be learned.
Consultants, including Aoifinn Devitt, a principal at London-based hedge fund specialist Clontarf Capital, said Silver Creek built its reputation “on its private equity expertise. It led to brilliant performance for the firm for years. It was never a secret what they were invested in, including private equity-hedge fund hybrid firms such as Cerberus (Capital Management). No one thought that such blue-chip names would have the kinds of problems they encountered last year.”
“Pre-crisis, Silver Creek did a good job of highlighting the illiquid investments in their portfolio as a performance differentiator,” added vendor consultant Daniel Celeghin, director, Casey Quirk & Associates LLC, Darien, Conn. “The fact that Silver Creek's low volatility fund had a substantial portion of illiquid investments in the portfolio shouldn't come as a surprise to anyone who invested in it,” he added.
Silver Creek's assets declined to $7.1 billion as of Sept. 30 from a peak of $9.1 billion in mid-2008. Assets managed in hedge funds of funds totaled $6.3 billion as of the end of September, of which 34% was managed for non-U.S. institutional investors, 26% for U.S. institutional investors and 40% for high-net-worth and other non-institutional clients as well as Silver Creek partners. The remainder was invested in three traditional private equity funds, which will not be closed or restructured.
Mr. Dillon remains adamant about the plan to shut down the firm's hedge funds of funds.
“The last thing we want to do is close these funds, but it isn't right to take new dollars — or to keep old dollars — in a structure that no longer is appropriate. We set the most draconian investment terms, with 20% sidepockets, with 7.5% quarterly redemption limits and with a much longer notice period (120 days) for those redemptions. We did what was prudent for investors, but it wasn't prudent for the environment we went into last year,” he said.
Next year, Silver Creek plans to introduce a new concentrated hedge fund-of-funds strategy that will completely match the liquidity of 15 underlying hedge fund managers and will avoid private investments completely. The firm also will launch a distressed credit fund in 2010 using a typical private equity term structure for private investments.
Silver Creek's chances of success will depend to a great extent on how well its team executes the restructuring and liquidation of the existing funds and the investment terms of the new funds, CQA's Mr. Celeghin said. “Many consultants will be watching Silver Creek very closely these days and the changes they've promised to make must be substantial and real,” he stressed.
Ms. Devitt, on the other hand, expressed concern that Silver Creek could spend more energy on building new investment strategies rather than aggressively unwinding the existing funds. “It is rather a cynical gesture to be raising new assets, rather than taking more of an activist approach to getting back the illiquid assets from frozen hedge fund managers,” she said.