BH Macro 18 January 2022

BH Macro (BHMG) has had a transformative year. At the end of August 2021, it completed a merger with BH Global to form a single company with assets of c. £940m and a more diversified shareholder base. At a stroke, this increased assets by c. 70%, making it a much more liquid proposition for institutional investors.

BH Macro is a feeder into the Brevan Howard Master Fund, a macro hedge fund. The Master Fund aims to generate capital growth through a combination of global macro and relative value trading strategies. These strategies are devised and managed by the traders at Brevan Howard, and comprise predominantly global fixed income and foreign exchange trades. As we discuss in the Portfolio section, Brevan Howard’s traders try to exploit pricing anomalies within these markets, and to provide investors with asymmetric pay-off profiles over defined periods. 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.

In this way, the Master Fund seeks to produce compelling asymmetric returns to its investors, independent of the market environment. As we show in the Performance section, BHMG has exhibited clear diversification from risk assets over its lifetime. It is during the years which have proved most difficult for equity markets that BHMG has historically performed strongest.

As a result of 2020 having seen the strongest performance in Brevan Howard’s history, the firm has been seeing a resurgence in investor interest, as well as having recruited a significant number of traders. Since the merger with BH Global completed, the shares have traded on an average premium to NAV of c.7%.

Brevan Howard as a business has undoubtedly seen a resurgence in investor appetite for its funds. We see it as an encouraging sign that Brevan Howard are adding to their team at the same time as their AuM is increasing. Over time, this should lead to a greater pool of high-performing talent. We also note a gentle shift in the culture towards a more institutional approach, and a desire to nurture and develop talent over time.

Brevan Howard indicates that recent hires have enabled greater exposure to liquid credit strategies, digital and quant strategies, all of which complement their existing areas. This should enable the team to continue to generate returns even though AuM has increased. The BH Master Fund is now soft-closed to new investment, so BHMG is the only way investors can access the strategy.

The historic annualised returns of 8.6% since strategy inception, with volatility of 6.1%, has been achieved over nearly two decades. However, perhaps of more relevance to the equity investor is that in the 20 worst performing months for equities over the Master Fund’s history, the Master Fund has delivered positive returns in 17 of them.

At the time of writing, the shares trade on a hefty premium to NAV of c. 8%. In our view, alongside the strong performance in absolute and relative terms, the premium reflects the market’s recognition of BHMG as a strong diversifier at times of equity market stress.