What started as a tale of a hedge fund gone wrong has turned out to have a happy ending.
Last year's financial meltdown left a convertible debenture fund run by Silvercreek Management high and dry: Prime broker RBC Dominion Securities took control of the fund after substantial losses.
Now, hedge funds that lost money weren't exactly rare last year. What made Silvercreek the subject of considerable interest in Bay Street circles was its backers, a list that included a who's who of Canadian business leaders.
Silvercreek was co-founded and run by Louise Morwick, and she attracted investors from among the top brass at investment dealers, plus a smattering of gold mining executives and several top private equity executives. The fund manager went into the downturn with total assets in the $300-million range, and a healthy amount of leverage, in the form of margin loans from Royal Bank.
But the wheels came off late in 2008, when the convertible debenture market dried up. When the investment dealer arm of Royal Bank of Canada stepped in to run what was expected to be a liquidation of the Silvercreek portfolio, Ms. Morwick was sidelined - she is still running other funds.
However, investors in the busted fund got organized, and nominated a group of four individuals, charged with seeing if there was anything to be salvaged from the wreckage. Those individuals seem intent on staying in the shadows, but sources say there were two retired Bay Street CEOs in the mix, along with a top private equity executive.
Expectations for this workout were very low: Several investors said earlier this year that they would be lucky to get back pennies on the dollar.
As the workout began, there was an adversarial relationship between RBC Dominion and some of Silvercreek's backers over the way the situation was handled. The mood began to improve as both sides moved forward with strategies for running the portfolio. Underlying this shift in sentiment was a swift, and welcome, recovery in the fortunes of convertible debentures.
In 2008, what's known on the Street as convert funds were the baddest of a very bad lot. (These funds buy interest-paying securities that can be flipped into equity. When stock and credit markets both tank, convertible funds get pounded. The reverse is true when both asset classes are flying.)
U.S. convertible funds fell an average of 26 per cent last year, the worst numbers for any asset class in the industry, according to the U.S. bible for hedge fund performance, Absolute Return. The average hedge fund was down just 6.9 per cent in 2008.
This year, convertible funds are soaring. It's the No. 1 U.S. hedge fund asset class, up 33.6 per cent, year-to-date. That's what brings us to the happy ending.
In recent weeks, RBC Dominion and the Silvercreek workout team cut a final deal on the portfolio. With the investment bank's help, long-time backers got a sizable cash settlement, and they continue to own a stake in a small portfolio that will be wound down over time. Everyone took a haircut, but it was a trim, not a buzz cut. Recoveries on this investment are several dimes on the dollar, not pennies.
Given the potential for embarrassment at Silvercreek - Canada's biggest bank in a fight over a busted fund owned by some of Canada's most successful CEOs - a quiet resolution with far more cash than expected qualifies as living happily ever after for all involved.
Andrew Willis