Hermes Fund Managers, the investment management arm of the BT Pension Scheme (BTPS) in the UK, is following the lead of OMERS in Canada and QIC in Australia by branching beyond the province of its principal client with the aim of being a funds manager for pension funds globally. Hermes’ head of investment, Saker Nusseibeh, said the group’s newly created boutique-of-boutiques structure was “so clearly the future…it’s the crossover we’ve been waiting for.” Nusseibeh said he was excited about the fee flexibility and alpha sources that could be achieved by a funds manager which is owned by an institutional investor.

“This is a different relationship, we don’t have to sell to clients and are not motivated by sales or fees,” he said. With the debate over the advantages of boutiques versus mega-managers raging furiously, Nusseibeh believed the boutique-of-boutiques structure was a way to overcome some of the structural problems of boutiques but maintain their alpha-seeking advantages. “The creation of hedge funds was a sign that the large institutional asset management model didn’t work. The fall of hedge funds showed that boutiques didn’t work. This is in between,” he said. “Alpha is produced by artisan shops, not factories, and we want to attract the specialist individuals by our boutique structures. The downfall of boutiques is sometimes that small means no trust, but we have capital backing.”

Hermes is the principal asset manager for BTPS, managing about 70 per cent of the assets, and any new areas of product innovation will be driven by where BTPS wants to invest. BTPS has been progressive in its allocations and investment techniques, significantly reducing its allocation to equities over the past few years, and targeting 20 per cent in alternatives. It also allows managers to use derivatives, and has long been a supporter of responsible investing. Nusseibeh, who became Heremes’ investment head in June following Roger Gray’s defection to the Universities Superannuation Scheme, said the manager was looking for de-correlated alpha, and was “open to everything”. Presently the business is divided into six main areas: Hermes BPK Partners (a fund of hedge funds); commodities; private equity, real estate, smaller companies; and focus funds.

Hermes employs about 400 people and with the investment platform built is now building a sales team beyond its 40 staff, with a large external push from January 1 next year. Hermes uses a multi-frame factor model for risk management that was created for its fundamental quant product, encompassing BARRA for equities, Point for fixed income, and Algorithmics for alternatives. It has investment teams in London and Boston, where Hermes is currently registering with the SEC, a research office in New York, and there are plans to establish in Hong Kong within 12 months. In the next few months team capabilities are being brought in for global credit and large cap European equities, and staff to run Japanese equities and emerging markets are also being sought.

The remuneration of senior Hermes management is on a five-year horizon, and performance fees are over rolling three year periods. Nusseibeh, who has a background in the private funds management market starting at Mercury Asset Management, and working for Fortis among others, acts like an inhouse consultant, policing the boutiques to ensure they are doing what they said they would do, and that the overall risk is suitable. “Funds management is about memory. The only difference between a good and bad fund manager is that a good fund manager remembers five and a half of each 10 mistakes he makes, while a bad funds manager remembers only five,” he said.

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