5 Feb 2010
Brevan Howard, the world’s biggest global macro hedge fund operator, has warned investors that “the macro environment is highly unstable” and that there is “significant potential” for either deflation to take hold or inflation to spiral. The warning came in a note sent earlier this week to shareholders in BH Macro Ltd., the exchange listed fund that closely approximates the $21 billion Brevan Howard Master Fund run by Alan Howard.
All of Brevan Howard’s open-ended hedge funds posted positive year-end performance gains. The closed-ended listed funds, BH Macro and BH Global, produced 2009 NAV returns in their dollar share classes of 18.04% and 14.31% respectively.
BH Macro and BH Global are respectively the largest and second largest single manager hedge funds listed on the London Stock Exchange and both are FTSE 250 companies. Together, these companies had more than $2.850 billion under management at year end or around 11% of the $26 billion of Brevan Howard’s total AUM.
The firm also confirmed it is considering the establishment of an additional affiliated investment manager in Geneva. It has now secured premises in the city and intends to commence investment management operations there by December.
During 2009 Brevan Howard built is investment team with the appointment of Fabrizio Gallo from Morgan Stanley as head of equities and Mark Hillery from Tudor Asset Management as a senior trading partner. The pair have added to the scope of the firm’s trading activities beyond its core global macro focus. Jean-Philippe Blochet, a founding partner and the ‘B’ in Brevan, formally resigned from the firm in December after spending most of 2008 on sabbatical to join Louis Bacon’s Moore Capital.
The macro background is leading Brevan Howard to focus on four broad themes:
Higher Volatility: The "Great Moderation" period saw lower macro and policy volatility. Going forward the fund manager sees a higher volatility macro environment, which is ideally suited to its trading style.
"Lower-for-longer" in the US: according to the consensus forecast, nominal GDP will grow by 4% in 2010 – a low level which would be among the worst performances witnessed during an expansion. This could make the recovery still feel like recession, making it hard see how the Fed can begin to raise interest rates.
Differentiation: In response to the financial crisis and global recession, most developed and developing countries have pursued some combination of aggressive monetary and fiscal policies. But not all economies have the same structural problems, so the outcomes have differed widely. An important theme for Brevan Howard is the degree of differentiation that will emerge among countries that pursued similar treatments but realized different outcomes. Such differentiation bets are seen to offer a major opportunity.
Emerging Markets: Brevan Howard sees a secular shift in favour of growth in emerging market economies with solid fundamentals versus G7 economies. These countries have growing domestic demand and have room for interest rates to move down as investors grow comfortable with responsible monetary/fiscal stewardship. But the manager noted that the danger with this theme is that it is very much consensus and therefore extremely crowded. Any challenge to the global growth story could cause a sharp and painful correction; consequently, trade construction which limits mark-to-market loss and allows positions to be held through a correction is of paramount importance.
“The prospect of an indefinite period of monetary and fiscal stimulus, coupled with moderate growth and tame inflation, is proving an irresistible lure for increased risk appetite,” the investor note said. “However, Brevan Howard continue to believe that the macro environment is highly unstable. Given these broad trends, and other more specific situations, such as the massive issuance of sovereign debt, Brevan Howard believes that the opportunity set for trading remains exceptionally rich.”
All of Brevan Howard’s open-ended hedge funds posted positive year-end performance gains. The closed-ended listed funds, BH Macro and BH Global, produced 2009 NAV returns in their dollar share classes of 18.04% and 14.31% respectively.
BH Macro and BH Global are respectively the largest and second largest single manager hedge funds listed on the London Stock Exchange and both are FTSE 250 companies. Together, these companies had more than $2.850 billion under management at year end or around 11% of the $26 billion of Brevan Howard’s total AUM.
The firm also confirmed it is considering the establishment of an additional affiliated investment manager in Geneva. It has now secured premises in the city and intends to commence investment management operations there by December.
During 2009 Brevan Howard built is investment team with the appointment of Fabrizio Gallo from Morgan Stanley as head of equities and Mark Hillery from Tudor Asset Management as a senior trading partner. The pair have added to the scope of the firm’s trading activities beyond its core global macro focus. Jean-Philippe Blochet, a founding partner and the ‘B’ in Brevan, formally resigned from the firm in December after spending most of 2008 on sabbatical to join Louis Bacon’s Moore Capital.
“The very significant potential of one or the other severe outcome is due to the underlying structural weaknesses in many developed market economies, such as the US and UK, which are being offset for the time being by massive fiscal, monetary and unconventional responses such as zero rates, bank guarantees, asset purchases etc,” the note to investors said. “The primary risk is of a policy error, or the market's fear of a policy error. This event risk is compounded by the extreme difficulty policy-makers will have in effectively communicating their intentions to the market.”
The macro background is leading Brevan Howard to focus on four broad themes:
Higher Volatility: The "Great Moderation" period saw lower macro and policy volatility. Going forward the fund manager sees a higher volatility macro environment, which is ideally suited to its trading style.
"Lower-for-longer" in the US: according to the consensus forecast, nominal GDP will grow by 4% in 2010 – a low level which would be among the worst performances witnessed during an expansion. This could make the recovery still feel like recession, making it hard see how the Fed can begin to raise interest rates.
Differentiation: In response to the financial crisis and global recession, most developed and developing countries have pursued some combination of aggressive monetary and fiscal policies. But not all economies have the same structural problems, so the outcomes have differed widely. An important theme for Brevan Howard is the degree of differentiation that will emerge among countries that pursued similar treatments but realized different outcomes. Such differentiation bets are seen to offer a major opportunity.
Emerging Markets: Brevan Howard sees a secular shift in favour of growth in emerging market economies with solid fundamentals versus G7 economies. These countries have growing domestic demand and have room for interest rates to move down as investors grow comfortable with responsible monetary/fiscal stewardship. But the manager noted that the danger with this theme is that it is very much consensus and therefore extremely crowded. Any challenge to the global growth story could cause a sharp and painful correction; consequently, trade construction which limits mark-to-market loss and allows positions to be held through a correction is of paramount importance.
