BH Global 16 January 2019

BH Global is a feeder into the Brevan Howard Multi-Strategy Master Fund. The Multi-Strategy Master Fund is a macro hedge fund, and aims to deliver strong risk-adjusted NAV returns in all market conditions. It aims to achieve this by gaining exposure to the range of trading strategies offered by Brevan Howard across multiple asset classes. Allocations to these different strategies, traders and asset classes are managed by Brevan Howard’s investment committee.

BH Global is differentiated to sister fund BH Macro, in that it has a potentially wider mandate and has historically had a more balanced portfolio with lower volatility and less concentrated exposure.

BH Global accesses trades through a variety of means, but mainly though investing in BH’s range of offshore hedge funds. The BH Master Fund (of which BH Macro is a direct feeder) is now once again the largest allocation within the portfolio at 46% of NAV. The Direct Investment Portfolio (DIP) currently consists of allocations to six traders, and represents 45% of assets. The DIP was one of the key drivers of returns during 2017, which was a more difficult time for the BH Master Fund.

The current portfolio represents the shifting opportunity set and the investment committee’s expectations of the potential returns on offer. As market conditions change then the exposures will change - at times being more similar to BH Macro, and at times having very different biases. Currently, the majority of exposure (as is the case with BH Macro) is to “Macro” and “Rates”, but the performance in 2017, where BH Global had c. 60% of NAV invested in the DIP, illustrates how the two companies' underlying exposures can differ at times.

Whatever their specific trading style or area of focus, Brevan Howard’s traders try to exploit pricing anomalies, and to provide investors with asymmetric pay-off profiles over defined periods in the future. These trades are typically leveraged (using margin), and might typically generate proportionately high returns if the trade works out, but should it not, then the maximum loss might be the cost of putting the trade on. The markets that the traders have exposure to, as well as the way they construct trades, means that the fund has demonstrated low correlation to equities and bonds. The most recent example of this was the "European stress" trade which BH Global had exposure to leading into May 2018, which had minimal downside, but demonstrated huge upside and the NAV rose by 5.4% in the month. This marked a welcome return to form for the managers.

Looking at monthly data since inception, it is rare to see a month in which the NAV falls by more than 2%, which reflects the fact that the risk management team tend to dial down traders’ risk exposure after significant falls from a peak. Brevan Howard emphasises that its team aims to control the risk they are taking in terms of actual losses incurred, and not volatility or VAR which they view as backward looking and therefore less helpful. Overall the managers believe risk is defined as permanent loss of capital which forms the backbone of their approach.

Since inception, the only negative year for BH Global was in 2015, which in our view illustrates Brevan Howard’s strong risk controls at work. The solid showing in 2018, with a return of 5.4% in the GBP share class, is perhaps made all the more noteworthy for the corresponding negative returns delivered by equities. In a rising interest rate environment, it appears that global multi-asset macro funds have been struggling. The performance differential opening up during 2018 between BH Global and Standard Life GARS is illustrative.

With the strong performance in 2018, BH Global has seen the discount narrow, and at the time of writing, the shares trade on a narrow discount to NAV of c. 3%. The board has stated that whilst it hasn't bought shares back since June 2018, it remains alert to discount volatility.

In our view, the discount having narrowed reflects the market’s recognition of BH Global as a strong diversifier in poor equity markets. In addition, the 2018 relative performance compared to some of the multi-asset macro funds such as SLI GARS shows the benefit of BH Global over such funds in terms of portfolio diversification, as well as being a strong contributor of returns.