Fund Spotlight: ACAP Strategic Fund (XCAPX)

The ACAP Strategic Fund (“the fund” or “the Strategic Fund”) is an equity-focused interval fund managed by SilverBay Capital Management, an arm of Alkeon Capital.

As of May 2021, the fund held $11.4 billion in net assets, invested primarily in U.S. tech stocks. This figure makes it the largest interval fund by asset volume, and its financial statements show it growing at a brisk pace. Here, we cover the fund’s:

1. Investment objectives and management details

2. Principle strategies and top holdings

3. Past performance

4. Fees and investor qualifications

Further details in addition to those discussed below can be found in the fund’s most recent prospectus.

OBJECTIVES & MANAGEMENT

The ACAP Strategic Fund is an equity fund with the stated objective of providing maximum capital appreciation to its shareholders. This contrasts with the income-focused strategies of most interval funds, which tend to focus on illiquid debt securities.

The fund’s advisor is SilverBay Capital Management, which is controlled by Alkeon Capital, a long/short equity hedge fund manager with 12 operational funds and over $67 billion in assets. Alkeon’s founder, Panayotis "Takis" Sparaggis, serves as the ACAP Strategic Fund’s primary portfolio manager. Prior to founding Alkeon, Sparaggis managed tech-focused portfolios for CIBC Oppenheimer Asset Management, and he holds a PhD in electrical and computer engineering alongside an MBA.

STRATEGIES & HOLDINGS

The Strategic Fund’s strategy centers, fundamentally, on stock picking. As noted above, the fund will be managed by Takis Sparaggis, whose experience in the classic long/short hedge fund strategy lends itself to the Strategic Fund’s choice of holdings. The fund focuses on the stock of companies with large market capitalizations, mostly in the United States.

The Strategic Fund’s long/short strategy is aimed at providing total return, regardless of how the broader market performs. It functions based on the advisor’s ability to evaluate which companies will perform well or poorly relative to others, and thus their familiarity with the fundamentals of commercial success in a given industry or sector. A long-short fund will hold stock in “good” companies, which are expected to disproportionately rise in price during bull markets, and short positions in “bad” companies, which are expected to disproportionately lose value during bear markets. These positions serve as a hedge against either type of market, ensuring that the fund will generate returns either from gains in their long-position stocks or profits from severe drops in their short-position stocks.

According to the fund’s most recent shareholder report, its holdings are most heavily weighted toward e-commerce products (10.07%), applications software (8.24%), computer-aided design (8.11%), and enterprise software (5.99%). This focus is in keeping with Sparaggis’s background in computer science and tech-focused investing, indicating that he’s confident in his ability to identify which tech equities have growth potential and which are overvalued and likely to fare poorly in down markets.

Nearly 80% of the fund’s holdings are in U.S.-based large-cap firms, with the remaining assets spread across global developed markets.

The fund’s top individual holdings are:

· RingCentral (5.5%), a cloud-based business communications platform

· Dreyfus Treasury Securities Cash Management (3.8%), a money market investment for liquidity

· Microsoft (3.5%)

· Facebook (3.1%)

· Amazon (3.0%)

As of late 2020, 4.1% of the fund’s assets, or $375 million, were in short positions on the S&P 500 and Nasdaq-100 indexes, which track the largest U.S. companies. The fund is leveraged at a 15.25% debt-to-capital ratio, which about half of the 33.3% interval fund leverage limit.

PERFORMANCE

Both year-over-year (fig. 1) and since its inception in 2010 (fig. 2), the ACAP Strategic Fund has outperformed major equity indexes. Despite losses on the fund’s net short position relative to the S&P 500, the basket of equities selected by the advisor has performed well relative to the broader market.

Fig. 1: ACAP Strategic Fund vs. MSCI Stock Indexes, 2020 (source: SEC filings)

Fig. 2: ACAP Strategic Fund vs. MSCI Stock Indexes, 2010-2020 (source: SEC filings)

The fund has exhibited consistent growth through time, both in its total assets under management and in its net asset value (NAV). In early May 2021, the fund’s NAV stood at around $25.50, up about 13% from the previous year.

Fig. 3: ACAP Strategic Fund Total Assets and Net Asset Value since inception (source: intervalfunds.org)

QUALIFICATIONS & FEES

The Strategic Fund is private, and it only makes its shares available to those with a net worth above $2.1 million. This barrier is in place to ensure that the fund’s investors are financially sophisticated, given the liquidity restrictions inherent to an interval fund. This high barrier to entry is a major contributing factor to the fund’s massive size; the minimum initial investment to purchase shares in the fund is $50,000.

The fund’s fees are notably high, even in a fund class known for its fees. On top of an annual management fee of 1.50% of net assets, the fund’s manager charges a 20% “incentive fee.” This extra charge, common in private fund structure like hedge funds and private credit, give the manager a fifth of the fund’s annual net gains on top of his share of the total pool of capital.

The fund offers two classes of shares:

· Class A, which are subject to a 0.75% shareholder servicing fee

· Class W, which have no additional fees but must be purchased through an institutional investor

The ACAP Strategic Fund’s legal team is Kramer Levin Naftalis & Frankel LLP.