Wed, 05/09/2012 - 14:17
Hermes BPK Partners is a provider of alternative hedge fund solutions part owned by Hermes Fund Managers. Representing the ‘P’ in BPK, Hedgeweek’s James Williams speaks with the firm’s chief executive officer and founding partner, Matteo Dante Perruccio (pictured), about its philosophy and fund range…
HW: When did the partnership with Hermes occur?
MDP: It was right around the time of the 2008 debacle. We were the first external boutique to partner with Hermes and also received the largest ever seeding for a FoFs platform which at the time of the commitment was about USD2billion. We are now 61 per cent owned by Hermes Fund Managers with the remainder controlled by the partners.
HW: Why did you go ahead with the partnership?
MDP: One of the reasons we wanted to do this was because we felt the industry was broken in many ways. Our overriding philosophy is that hedge funds are fantastic building blocks to achieve risk-adjusted returns, but it depends how you put those blocks together. Did we think the traditional FoF model was the optimal way to do that? No.
We also felt that the industry as a whole was preoccupied with asset raising. It became a culture of taking fees rather than earning them. So we decided that we needed to find a partner that believed there was a better way of doing things. Hermes is a great brand and a leader in corporate governance and responsible asset management. We felt that building trust would be a key differentiator and, in turn, crucial in the next phase of our evolution. Rather than being simply another boutique we wanted to be seen as a serious player associated with a name that investors could trust.
So we thought, ‘let’s build a new model where we’re focusing on doing the right thing and building portfolios we believe meet the needs of institutional investors’.
HW: How important a role does transparency play in the way the firm operates?
MDP: “We’ve always believed in the power of transparency, even before more emphasis was placed on it in recent times. Our view is if an investorgives us USD25million they should be able to see what they want. How anyone can say ‘I’ll take your money but I’m not going to tell you what I’m doing with it’, is frankly something that we never understood.
The consistent feedback we’ve got back from investors is that our risk reporting is first class in terms of what we give and how we present it. There’s also an element of reputational risk given our association with Hermes, so robust risk management sits right at the centre of our approach. We fundamentally believe in having a strong ethical approach to the way we manage money for our clients.
HW: Do the managers you invest with buy in to this philosophy?
MDP: So far, once we have explained our philosophy to our managers they have embraced it and understood our approach. We’ve had no pushback. In addition to that, if we have a hedge fund do something for us, we always insist they do it for all their investors.
HW: The Hermes BPK Fund is the firm’s flagship low volatility fund. What are the favoured strategies in the portfolio?
MDP: It’s pretty diversified. Macro, CTA, event-driven, some distressed debt and credit strategies, and tail risk volatility strategies as well.
We’re actually moving away from a fund orientation to an absolute return solutions approach. We’re talking with a couple of big institutional investors about building thematic buckets in an overriding absolute return solution. That means that if a client wants to dial up concentration, adjust exposure to particular areas or reduce their market correlation, we are able to design solutions which achieve just these objectives.
HW: And how has performance been this year?
MDP: So far, through July this year, the Hermes BPK Fund is up approximately 0.70 per cent showing a volatility since launch of under 3%.
HW: You also have a Restructuring Fund, a CTA Fund and a Global Equity Hedge Strategies (Trading) Fund – how has performance played out in these funds?
MDP: the Trading Fund is currently up 3.4 per cent through July. The Restructuring Fund for the year is up approximately 4.6 per cent: it has returned over 6.7 per cent per annum since launch in January 2009.
Our CTA portfolio – Alpha Vault – consists of five fund managers on a managed account platform. To the end of July, the portfolio up 3.2% since its launch in December 2012.
The managed account platform is structured as a QIF and offers the best of both worlds: it’s a limited liability structure which offers high levels of control while being regulated by the central bank of Ireland.
HW: Finally, you use a risk management system called FLAG. Could you explain how this works?
MDP: The problem with doing quantitative work to understand how portfolios are affected by scenarios is that it is a backward-looking approach, and therefore only part of the story. In addition to the quant work our analysts conduct, they receive monthly responses to a series of sensitivities on a scale of 1 to 10.
If interest rates were to spike for example, we aim to gauge how sensitive a particular manager's portfolio is to that event. Is it a +3 sensitivity or a -3 sensitivity? We then factor that into the model and that gives us a better understanding, we believe, of how the portfolio may behave in a variety of different scenarios.
What we’re therefore trying to do is be more forward-looking. Essentially, we’re looking at the underlying managers are positioned and how their current positioning would fare in both gradualistic shifts and moments of shock. It is what we call a Forward Looking Analysis Grid (FLAG).
It’s not perfect, it has flaws, but it is one of tools we’ve got to try to understand managers and get a better handle on future risk.
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