BH Macro 16 September 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BH Macro. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
BH Macro Limited (BHMG) is a listed hedge fund with net assets of c. £1.2bn, and is a feeder into Brevan Howard’s flagship Brevan Howard Master Fund Limited, (Master Fund). The Master Fund is invested across multiple Brevan Howard investment strategies. This makes BHMG’s shares the only access point for retail investors, not to mention the fact that being listed on the LSE it is also more liquid.
Capital is allocated across a wide range of traders, most of whom have exposure to developed bond and currency markets, although there is exposure elsewhere (see Portfolio section). In having no house view, traders are free to position their allocated capital however they wish, as long as they stay within strictly defined mandates and risk controls. Traders aim to construct strategies, often contingent in nature, with superior risk/return profiles, whose outcomes will often be crystallised by an expected event occurring within a pre-determined period of time. Traders use a wide range of instruments to construct trades, including options and futures. Allocations to traders and strategies are set by Brevan Howard’s investment committee.
The current premium to NAV at which BHMG’s shares currently trade, as can be seen in the Discount section, is in our view reflective of the strong diversification properties exhibited by the Master Fund, particularly since 2020. Whilst BHMG has delivered positive returns over this period, the strongest periods of performance since IPO have come at times of stress for equity and bond markets.
As well as returns, in our view one of the chief attractions of BHMG is the ability of the managers to control downside risk. Risk management is a key part of the investment process. BHMG’s maximum NAV drawdown since IPO of 11.3%, compares to the MSCI World’s maximum drawdown over the same period of 35% (Source: Morningstar).
As discussed in the Portfolio section, the managers have shown so far that their investment process is repeatable, not built on an ability to forecast the future better than anyone else, but through a probabilistic interpretation of events compared to what the market is pricing currently. In our view, investors should consider an investment in BHMG, not for its specific exposures but for the team’s continued ability to dynamically construct asymmetric trades which offer the prospect of good risk-adjusted returns over time, along with the Master Fund’s strong historic diversification properties. Brevan Howard see their ‘edge’, or ability to continue to generate good risk-adjusted returns, resting on three pillars of expertise: macro thinking, trade structuring and risk management, none of which appears threatened by the firm’s success in raising assets over recent years.
Historically, the Master Fund has generated strong risk-adjusted returns and particularly at times of market stress, as discussed in the Performance section. Brevan Howard has been hiring trading talent as well as developing new initiatives under CEO Aron Landy, allowing it to broaden the markets and products it offers clients. Overall, BHMG’s shares offer strong diversification to traditional portfolios, which is likely the reason that BHMG’s shares have been trading at such a significant premium over latter years. As discussed in the Discount section, in our view this presents something of a risk for investors, given the potential for the shares to de-rate if NAV returns disappoint over any period.
- Highly differentiated investment proposition, with few easily accessible comparable peers
- Diversifier to equities and bonds– strongest performance has historically come at periods of market stress
- Larger size of company, following merger with BH Global, with better liquidity and less concentrated share register
- Opaque underlying positioning
- Can go through periods of relatively lacklustre returns
- Higher fees than traditional funds and trusts