Ermitage: Making Investment Count

Ian Cadby on his firm's post-MBO success

Originally published in the December 2007/January 2008 issue

Ian Cadby is no stranger to the island of Jersey. He went to school there, and it was to Jersey he returned when he joined fund of hedge funds manager Liberty Ermitage in 2001. Ermitage is no stranger to Jersey either, having had an operation on the island since 1975. Cadby is enthusiastic about the jurisdiction, and about its prospects for attracting more physical hedge fund business: “Jersey has the potential to be the Connecticut of the British Isles,” he says. “It has a better lifestyle, it’s got the infrastructure and the IT support we need, and it has regular flights to London.”

Cadby joined Ermitage to take the role of Chief Investment Officer, recognising that it was one of the oldest fund of funds operations in Europe. Cadby had the right pedigree to play a larger role in the organisation, having worked on the options desk at UBS, and with Cresvale Asset Management in the 1990s. He had also spent some time in Asia, with Citibank and later Regent in Hong Kong. But as a ‘local’ he could also see that the business, led by former CEO Ron Mitchell, had plenty of potential to continue to build a competitive fund of funds business from a base within the Jersey seaside capital of St Helier. One of his early initiatives was to create an early stage manager seeding vehicle – the Strategic Partners Fund. It was a signal of significant changes ahead for the business as a whole.

Moving with the times

In 2001, the typical Ermitage client was a Swiss private bank, and the firm’s average ticket size was $5 million. It was a firm, like many other fund of hedge fund shops, focused on the traditional wealth management clients that had provided it with business in the 1980s and 1990s. That, of course, has changed, along with the composition of the European hedge funds industry, as pension funds and second tier investment banks began actively investing. To remain competitive, however, Cadby thinks funds of funds have to change, and can no longer rest on their laurels, providing bread-and-butter multi-strategy portfolios. Those investors that were happy seeing top quartile returns from their funds of funds are now becoming more specific in their appetites. “Now they want bespoke portfolios, managed accounts, they spend six months modelling their requirements, doing the stress-testing,” Cadby says.

Ermitage’s response, under Cadby’s aegis, has been the launch of an in-house quant system, called Lewis. It represents a comprehensive and sophisticated database, containing data on over 4500 hedge funds and meeting notes on more than 2000 funds, which sits at the heart of the Ermitage organisation. “We have been building it out from statistical analysis, it has heat mapping, risk management modelling, and visit notes, all in one package,” he explains. This proprietary approach has gone down well with the Ermitage clientele, and the firm has also been asked to consider licensing it or launching it as a stand-alone product that other funds can make use of.

Ermitage has also introduced a new risk management system to sit alongside Lewis. While Lewis has been designed as an integrated toolset, to be used to assist manager discovery and ongoing portfolio management, Optics tackles portfolio design with a view to meeting specific risk management requirements. It uses a forward-looking return forecast structure, spanning a range of potential market environments. Once suitable forecasts have been developed, a proprietary algorithm identifies the portfolio with the highest probability of meeting the client’s stated return objectives. This portfolio provides a starting point from which to explore a range of alternative portfolios that meet client requirements with respect to return and risk, subject to specified constraints and preferences.

Optics sets out to provide Ermitage clients with a high degree of interactivity over each stage of the portfolio construction process, and with an established audit trail once decisions have been taken as to which funds to include, and why. “It is an advanced way of creating portfolios,” says Cadby. “It is highly transparent, and forward-focused. It allows for plenty of client input, and they seem to feel more comfortable with this ‘glass box’ structure. Some of the more sophisticated elements within Optics have allowed us to implement portfolios in a more holistic fashion.”

All the investment ploughed into Lewis (and more recently, Optics) has allowed Ermitage to launch new funds along traditional lines (ie. open to third party investment). This has included a Resources Fund, a European Multi-Strategy Fund in January this year, and a Global Long/Short Fund in August. “The recent funds have used all the existing portfolio modelling and insight,” says Cadby. “We’re still very much committed to existing fund structures as and when they’re needed, but we’re becoming more bespoke now. We have our own systems that can provide portfolio construction data and analysis. “We’ve seen extensive interest in the Resources fund,” Cadby adds. “It has a low correlation to the main ‘passive’ commodities indices.”

The fund seems to have tapped a vein of enthusiasm for absolute returns based on commodities, and Ermitage is confident its asset base will continue to expand rapidly. With all three new launches now north of $100 million, the firm’s approach to asset management is obviously winning adherents among big ticket investors.

New faces, new markets

When The Hedge Fund Journal first interviewed Cadby, and Ermitage Chairman Paul Myners, back in the first quarter of 2006, they were celebrating the success of their MBO from South African insurance group Liberty, with the backing of UK investment trust Caledonia. The transaction allowed Cadby to make his mark on the firm, taking it from established asset management brand to serious institutional label.

The development of Lewis and Optics and a more quantitative approach overall, has also been reflected in the key hires Ermitage has been making, with Nick Macleod joining the firm from his role as head of quant at FRM last year. Todd Scanlon came aboard from ABN Amro to help build a stronger institutional marketing presence in London, and Ermitage has continued on a recruiting drive in the UK this summer, expanding both its sales and investment teams.

Cadby considers the continued development of the UK office as essential if Ermitage is going to win significant mandates from the British pension fund sector. He is acutely aware that most of the large FoHF mandates go to one of the top eight or nine firms by assets under management. To compete, he reckons he will need to deploy an experienced team that can engage the consultants more closely.Other senior hires since the MBO include Jonathan Watson, formerly chairman and chief executive of HSBC’s private banking and trust business in Jersey. He has become Chairman of Ermitage’s dedicated wealth management division, which still runs private client assets on an absolute return basis, with the emphasis on alternatives.

Having withdrawn its original US presence following the MBO – Cadby saw it more as a legacy of the Liberty era, when it was possible to put two hedge fund analysts into the New York office of Liberty’s parent, Standard Bank – Cadby is now serious about opening a new stand alone US office imminently. “We have decided to make this move as a significant statement to the US market,” he says. This includes the application for a broker-dealer license, as well as more serious hires in the pipeline to act as Ermitage’s face in America.

Cadby thinks Ermitage will have a marketing edge in the US, thanks to its recognised expertise as a fund of funds manager in Europe. He is anticipating demand for substantial bespoke portfolios focused on European hedge funds. He also pronounces himself more than satisfied with the ease at which the firm has been able break into the US market, which he had originally envisaged as a highly challenging region to get to grips with. Part of its success is down to the robust way in which Ermitage has been re-designed by Cadby and his team – it is an operation that has been set up for ease of interaction with institutional clients, and American investors, with their penchant for data-crunching, have found the high levels of quantitative information and transparency Ermitage offers, to their liking. In addition, seasoned investors like endowments and foundations, while familiar with hedge funds, have responded enthusiastically to the additional layer of support that the Jersey firm has been able to offer them in portfolio construction.At the same time as focusing its resources on the US institutional market, Ermitage has also sold its Luxembourg fund administration business to HSBC, as this was not considered to be a key growth area, and Cadby also wanted to avoid any conflict of interest concerns. “Fund administration is also a very resource-intensive and management-intensive business,” he says.


Ermitage remains heavily committed to the island of Jersey, which continues to serve as its strategic headquarters. It employs close to 40 personnel in its St Helier offices, versus 15 in London, although the London operation looks set to continue to expand. “Jersey has become more flexible, allowing businesses to import people from the UK under the ‘J’ category license,” says Cadby. He thinks the lifestyle Jersey offers can be a big selling point when seeking to make senior hires from off the island, former FRM employee Macleod being a case in point. “Nick was very keen to come over and make the switch from the busy urban lifestyle.”

The reality is that for Ermitage’s Jersey staffers, they can still be sitting in the firm’s Savile Row office by nine o’clock in the morning if they have to be. The island’s close proximity to London and regular flights, mean that the City and the West End are readily accessible.

“There is lower staff turnover in Jersey,” says Cadby. “We have no problem attracting people in their thirties to come and work here. The guys we can’t attract are people with MScs in the 25 to 30 age group. Otherwise, it is very easy to persuade people to move here, and they end up not wanting to leave again. It acts as a soft lock-in.” And Ermitage has also been able to meet many of its personnel needs from the local labour pool. “There are a number of very talented Jersey-born analysts working for us, individuals who have shown they can do extremely well in this industry,” says Cadby.

Other plus factors behind a Jersey presence include much cheaper office space than Mayfair, at around £27 per square foot for prime St Helier real estate, and access to the very large private client asset pool the island’s banks and trust companies control.

Despite its focus on growing its institutional business, Ermitage has retained its private client wealth management business, all of which is sourced from the Channel Islands.

The view ahead

And what of the future? Cadby is confident Ermitage can raise approximately £1 billion in new assets organically next year. He is also on the acquisition trail as he seeks to expand his business quickly: “We’re still looking to make some acquisitions [of firms] with a billion dollars or less under management,” he says. “We have also been approached to consider selling equity at holding company level to large institutions that are seeking exposure to the fund of funds market.”

“We have a huge risk management team, good infrastructure, and we’ve done it by deliberately going out and attracting sophisticated clients”

Cadby is keen to expand further into the US and Asia as well, and sees the acquisition of smaller businesses as the key to this. “We’re running $2.8 billion at the moment because we’re over-capitalised. We have a huge risk management team, good infrastructure, and we’ve done it by deliberately going out and attracting sophisticated clients. If you look at the top 50 funds of hedge funds globally, virtually all the businesses managing between $10 billion and $20 billion have joint ventures of some kind with investment banks.”

Acquisitions are a good way of adding experienced and talented personnel to an existing business. Cadby points to the deal done by FRM with the ex-Schroders team in Japan as an example of the kind of expansion play he hopes to initiate. “There are fewer and fewer competitors in this territory, and the likelihood of staff defecting is small,” he explains.

The Ermitage CEO is upbeat about the future for the fund of hedge funds business as well, although he predicts a period of consolidation, starting next year. “The volume of assets coming into the hedge fund business is huge,” he says. “Because of this level of buying power, I’m predicting consolidation within the fund of funds sector.” Funds of funds will still have a significant role to play as critical intermediaries between large scale investors and hedge fund managers: “We have a sophisticated platform, but a $100 million mandate still gets you to see the top team. The fundamental value proposition for funds of funds is that hedge funds are opaque – funds of funds will often give you the transparency and capacity you wouldn’t get if you went direct.”

He sees fewer funds of hedge funds competing for institutional money going forwards, but those that are in the market will be big ($2-$10 billion AuM) businesses, with a high degree of familiarity with the use of leverage. “These are firms with significant assets and good return streams, but they won’t be overly large.”

As for the underlying hedge fund opportunities he seeks, Cadby thinks it will get harder to find good managers, comparing the process to “finding a needle in a haystack.”

Behind the façade of Ermitage’s harbour side offices in St Helier there are all kinds of intriguing schemes being hatched, including a $500 million joint venture with an investment bank to create a new hedge fund seeding vehicle building on the firm’s expertise: Ermitage was one of the early backers of macro fund Harmonic, now with over $500 million under management. The firm is also looking at the possible establishment of a film finance business, and a leveraged loans outfit.

“In January 2001 we were seen principally as a high conviction, qualitative fund of hedge fund,” says Cadby. “We did not have a dedicated quant team then. Even now, there are only a handful of firms that have spent capital on transforming their business.”

He is proud of how far the firm has travelled in the relatively short time since it was bought out from Liberty, and thinks it can travel much, much further. Coming out of the August financial crisis, he has seen some fund of funds announcing losses of 5-7% YTD, while Ermitage’s performance is less volatile. This, he feels, is testament to the solidity of the business that Ermitage has become, and a good indicator of its institutional-grade credentials going forwards. As institutional investors continue to raise the bar in terms of their expectations of the funds of funds industry, it is firms like Ermitage, with the foresight to invest in the right systems and people to meet this challenge, which are likely to benefit.