Silverado convert arb manager content in sidelines, not reaching beyond limits

By Ronda Fears

Nashville, Feb. 14 - One of the most common ways John Siebel, director of trading for Silervado Capital Management, describes himself is that he is not a hero.

In a convertible market that is rich and many new issues coming with expensive terms, he's content to sit on the sidelines.

"If you start reaching and trying to do things out of your discipline, that's when you get hurt," said Siebel, who also is responsible for managing the firm's convertible arbitrage strategy.

"If we have to sit out in order to maintain our discipline, then so be it."

As hedge funds go, Silverado operates one of the more conservative disciplines in targeting cash flow versus playing volatility.

It may not produce sexy returns, but at the same time it helps limit exposure to potential blowups.

For January, Silverado's return was 0.67%.

It's underfunded, with fund assets at $13.2 million whereas total assets under management are $21.4 million, but Siebel is not willing to jeopardize the fund to be fully funded. Some funds are mandated to be fully funded.

"I'd rather be sitting on cash right now than holding some of this stuff," Siebel said.

"In today's market, if you were 100% underinvested, 100% cash, you'd look pretty good."

A lot of volatility players are picking up recent new issues, like Micron Technology Inc. and McData Corp., because there is nothing else to do. But most of the new issues are underwater already.

Siebel played Tyco International Ltd.'s new issue in January, because he still believes in the story and the terms looked decent.

It comes down to stewardship and experience.

"We limit our exposure to any one name or issue" so if, or when, something blows up the fund is not decimated, he said.

Jeff Cohen, managing director of Silverado, is a 30-year veteran of the securities industry and Siebel has more than 20 years of experience.

Having been through a down cycle or two, he said, they know better than to be overweight. Disasters are going to happen, it's part of the risk of the business. But at a time like now, if you get caught in a huge disaster, there is little in the market to pick up to make up for it.

"Prudence dictates that you just sit on the sidelines," Siebel said.

"Until the risk/reward factors are there, I'm going to bide my time. Every indication is that this will be a tough year. All the more reason to be more prudent."

Silverado gravitates to the better credits, leaving even the new issues that were cheap and tempting such as Sierra Pacific Resources' recent offering to others. The fund targets cash-paying bonds or standard convertible preferreds.

The fund's average premium is about 45%, which Siebel said is higher than he'd like. But it's much lower than the market average of nearly 75%. And, he noted that when they picked up those positions the premiums were 20% to 25%.

It is a bit more challenging right now to maintain a market-neutral hedge, he said, as it requires more trading but carry costs are lower so fees aren't outrageous.

Thus, on a day-to-day basis he's busy, but diligent to his discipline.

"I'd rather not be a hero," Siebel said.

"I'll let our returns speak for themselves. This uncertainty in the market is temporary. When things turn around, we'll be ready."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.