Highly commended: Best performing specialist fund of hedge funds over one year and Most innovative fund of hedge funds

The Hermes BPK Restructuring Fund was launched on January 1, 2009 to take advantage of the illiquidity premium around corporate, structured product or governmental balance sheet restructurings resulting from market dislocations.

The fund is very concentrated. It allocates its assets to 8-12 managers, the majority of whom are active in credit.

“Being ‘evergreen’ rather than ‘self maturing’ means allocating across a range of investment styles from classic distressed debt, distress for control, asset-based securities (ABS) and long/short credit through to value creation via the equity of companies,” explains fund manager Gregory Knott.

“The mix of approaches is a function of the point in the credit cycle. It incorporates style, geography, size, liquidity and underlying asset-type into an allocation mix designed to produce a balanced portfolio underpinned by robust research.”

This depth of research is necessary to both support position sizes which range from 6% to 14% of fund assets as well as to uncover and tap into the sweet spot offered by the smaller ‘off the run’ managers.

Since launch the fund has evolved through a number of distinct phases. Initially it followed a top down approach looking at macro-oriented funds within which an ability to trade flexibly was considered paramount. The fund then moved to increase the distressed component available.

It then moved into ABS, once the regulatory risk was understood, and finally to a reduction in higher beta names and a focus on credit differentiation as financial stimulus was withdrawn. A commensurate increase in off the run managers has built additional differentiation into the fund.

Such active management in a concentrated book needs to be underpinned by the highest quality research. “We pride ourselves in being best-in-class, going far beyond the standard approach,” Knott declares.

In this fund Hermes BPK has taken an industry lead in creating a three-year fee structure which allows re-imbursement to the client of performance fee overpayment in poor performance years. “Such an approach fosters a partnership which extends beyond investment into true alignment of interests,” Knot explains.

Hermes BPK employs 21 people, with 19 on the investment side. The average industry experience is 12 years. The original 10 partners were part of a ‘lift out’ from Pioneer Alternative Investments in 2008 and form the core of the team. The company has achieved annualised returns of 13.48% with volatility of just 3.82%.

Fund facts

Full name of fund: Hermes BPK Restructuring Fund
Fund manager: Gregory Knott
Name of investment/manager company: Hermes BPK Partners
Contact: Chris Greenall (c.greenall@hermesbpk.com)
Launch date: January 1, 2009
Assets under management: $387.1 million (at end September 2010)
Net cumulative performance since inception: 24.77% (at end September 2010)
Annualised return: 13.48% (at end September 2010)
Annualised volatility: 3.82% (at end September 2010)
Sharpe ratio 2.74% with a risk free rate assumption of 3%
Strategy: distressed/restructuring
Share classes: I and A shares
Administrator: Northern Trust International Fund Administration Services (Ireland)
Auditor: Deloitte & Touché (Ireland)
Custodian: Northern Trust Fiduciary Services (Ireland)
Domicile: Ireland
Listing: Irish Stock Exchange
Management fee: 1% (I share)
Performance fee: 10% (available with a three-year clawback option)
Minimum investment: €7.5 million (I Share)
Lock-in/up: two-year lock up
Redemption period/liquidity terms: annual with 95 days’ notice after initial lock-up