Ermitage Resources Fund: Ermitage Group

European Fund of Hedge Funds Awards 2009

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From a holding of 15-20 funds, the goal of the Ermitage Resources Fund is to construct a portfolio capable of consistent risk-adjusted returns, to a target return range of 12%-15% and volatility of 8-12%.

The fund looks to achieve medium to long-term growth by investing mainly in resource and other commodity related funds pursuing primarily relative value and/or arbitrage strategies. It also seeks short-term investment opportunities and direct investment in equities and equity related securities within the global mining and resource sectors.

The fund's current average annualised return is 11.7%, while volatility is at 7.45%. The portfolio includes a range of strategies including energy, agriculture, multi-systematic, metals and multi-discretionary, with the latter currently receiving the highest weighting in the portfolio at 30%.

Fund manager Daniel McAlister says the fund has suffered to some extent in recent months by not being a big player of commodity equities, which have risen substantially in 2009.

The fund is over 90% invested in commodity trading managers, many of whom under estimated the demand for commodities in 2009 driven by higher than expected GDP growth and continued restocking of resource inventories by countries such as China.

However, the fund made money in the turbulence of 2008 and the fund is in positive territory this year, says McAlister. "We have some good traders who have made money in all markets and migrated their views from bearish to bullish."

McAlister says the fund subscribes to the long-term opportunities in commodities.
"Longer term we are optimistic on the finite resources argument. Carbon and metal resources broadly speaking are going to be overbid in the years to come with demand outstripping supply. We could see some asymmetrical moves in some commodities," he says.

Feeding this will be growth in the emerging market economies but issues to deal with will be the aftermath of quantitative easing and the huge debts governments have and how those issues are addressed.

The investment process at Ermitage is highly structured and undertakes comprehensive qualitative and quantitative manager research to identify talented managers within each strategy.

Where the group has an edge over other companies, it contends, lies in creating ‘all weather' portfolios, combining specialist investment professionals and highly advanced proprietary investment tools.

The group uses two such tools. The first is its database, LEWIS. This provides detailed analysis on over 5,000 hedge funds. The second is the proprietary system OPTICS. This constructs and stress tests the group's portfolios, including peer group, cluster, tail risk and factor analysis and enables Ermitage to build portfolios to achieve stated objectives for a range of market scenarios.

"We believe it is not just about finding 'good' funds. It's about understanding the nature of each fund's strategy, how it copes with a range of market conditions and specifying an exact role for it to perform in the portfolio, to fully align the portfolio with its objectives," says McAlister.

The manager selection and asset allocation process uses scenario testing to ensure portfolios can perform in more than one environment, with the aim being to find an effective ‘balance' of market positioning.

All the scenarios the group employs are designed using qualitatively-derived forward forecasts. As a result, the fund tends to favour investing with managers that can dynamically adjust to changing market scenarios.

Ermitage launched its first hedge fund in 1984 and its first fund of hedge funds in 1997. The Resources Fund was launched in June 2005.

FUND FACTS: ERMITAGE RESOURCES FUND

Full name of fund: Ermitage Resources Fund
Name of portfolio manager: Daniel McAlister
Name of investment/management company: Ermitage Group
Contact: Stephen Smith, 47 The Esplanade, St Helier, JE1 9LB, Channel Islands (+44 (0)1534 615 563)
Launch date: June 2005
Assets under management: $99.2 million
Annualised return: 11.7%
Annualised volatility: 7.45%
Strategy: commodities
Share classes: US dollar, euro, sterling, Swiss franc
Administrator: Bank of America Fund Services (Ireland)
Auditor: PricewaterhouseCoopers
Custodian: HSBC Security Services (Luxembourg)
Domicile: Jersey
Listing: Irish Stock Exchange
Management fee: 1.5%
Performance fee: 10%
Minimum investment: $100,000
Lock-in/up: none
Redemption period: monthly

 

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