Results analysis: BH Macro

• Brevan Howard Capital Management LP (the “Manager”) achieved excellent returns in 2022 during a turbulent period in markets, the global economy and geopolitics. The NAV per share rose by 21.91% for the Sterling share class, which were impressive relative returns compared with other asset classes. In the Chair, Richard Horlick’s, view this absolute and relative performance makes BH Macro Limited a cornerstone in investors’ portfolios.
• The economic environment last year proved favourable for Brevan Howard. Their core theme of higher US rates played out during the first three quarters of the year. When sentiment shifted in the fourth quarter toward the possibility of an end to the rate-hiking cycle in the US and concerns about recession in Europe, Brevan Howard Master Fund (the “Master Fund”) (into which BHMG invests) was able to generate additional gains by positioning for lower rates. European interest rate trading was much more tactical throughout the year, also contributing to gains. Not only did the traditional macro directional strategies perform well, but so too did a range of other strategies including FX, relative value, inflation, and emerging markets.
• Coming into 2023, hopes that a soft landing would be achieved hit the skids in March when the Fed and the ECB turned more hawkish on inflation and unleashed a cascade of bank failures and retrenchments. The board remains confident that BH Macro’s manager is very well placed to weather these choppy waters and, given BH Macro’s longstanding track record of performing in such uncertain environments, the case for holding the company in an investment portfolio remains as strong as ever.
• The board is wholly independent of the Brevan Howard group and maintains a regular dialogue with the manager in order to assure itself of the quality of the investment team and supporting systems, operations and infrastructure across the organisation. The manager has continued an intense focus on developing the quality and depth of the trading team, including expanding capabilities into new, related areas, designed to add complementary performance and diversified return streams for the benefit of the company, while allowing the manager to manage a greater pool of assets. BH Macro’s Chair states that he believes that the trading team today is the strongest it has ever been.
• Brevan Howard observe that global imbalances, both within individual economies as well as between them, in part due to economic desynchronisation, are at generational extremes. As a consequence, the macro landscape looks set to remain extremely interesting.

Kepler view

BH Macro invests all of its capital into the Brevan Howard Master Fund, the flagship hedge fund run by Brevan Howard. 2022 proved a banner year for BH Macro, delivering exactly as shareholders would have hoped by achieving a strong NAV return at a time when the rest of their portfolio was having a significantly tougher time. Importantly, the share price remained firm throughout this period, and the sterling shares traded at an average premium of 10.6% during the year, enabling the board to issue shares worth c. £185m.

Ongoing charges excluding performance fees rose very slightly from 1.79% for 2021 to 1.88% to 2022. Including performance fees, the company’s ongoing charges are high at 6.1% (for the Sterling share class) reflecting the very strong performance over 2022. Early in 2023, the board announced the publication of a prospectus which allows the company to issue a limited number of shares for 12 months. In the initial fundraising under this prospectus, BH Macro successfully raised a total of c. £315m. At the same time, the company completed a 10 for 1 share split to aid liquidity in the shares.

More recently March 2023 was a tough month. As at 31st March 2023 the estimated Net Asset Values was 404p, reflecting a decline of 4.33% over the month, and -3.45% over the calendar year to date. We observe that many other macro hedge fund strategies have also fallen significantly, many having been negatively influenced by the very significant move in US interest rate expectations that followed the collapse in Silicon Valley Bank.

We share the Chair’s view that the long term case for holding BHMG remains as strong as ever. The negative performance during March has unsurprisingly taken some of the shine off the share price rating, having retreated to a modest premium to NAV of 3.9% (as at 06/04/2023).

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