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Monday 01 February, 2010

BH Macro Limited

Monthly Shareholder Report

RNS Number : 4887G
BH Macro Limited
01 February 2010
 



 

 

 

 

 BREVAN HOWARD

 

BH MACRO LIMITED

MONTHLY SHAREHOLDER REPORT
DECEMBER 2009
 
ADV01965 CONFIDENTIAL DO NOT COPY OR DISTRIBUTE
Your attention is drawn to the disclaimer at the beginning of this document
© Brevan Howard Asset Management LLP (2010). All Rights Reserved.


 

Important Legal Information and Disclaimer

BH Macro Limited (the "Fund"), is a feeder fund investing in the Brevan Howard Master Fund Limited ("BHMF"). Brevan Howard Asset Management LLP ("BHAM") has supplied the following information regarding BHMF's December 2009 performance and outlook. BHAM is authorised and regulated by the Financial Services Authority.

This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the "Act") and the handbook of rules and guidance issued from time to time by the FSA (the "FSA Rules"). The material relating to the Fund and BHMF included in this report has been prepared by BHAM and is provided for information purposes only and does not constitute an invitation or offer to subscribe for or purchase shares in the Fund. This material is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material relating to the Fund and BHMF have been obtained or derived from sources believed by BHAM to be reliable, but BHAM makes no representation as to their accuracy or completeness. Estimated results, performance or achievements may materially differ from any actual results, performance or achievements. Except as required by applicable law, the Fund and BHAM expressly disclaim any obligations to update or revise such estimates to reflect any change in expectations, new information, subsequent events or otherwise. All investments are subject to risk. Prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decisions.

Tax treatment depends on the individual circumstances of each investor in the Fund and may be subject to change in future. Returns may increase or decrease as a result of currency fluctuations. You should note that, if you invest in the Fund, your capital will be at risk and you may therefore lose some or all of any amount that you choose to invest. This material is not intended to constitute, and should not be construed as, investment advice. Potential investors in the Fund should seek their own independent financial advice. BHAM neither provides investment advice to, nor receives and transmits orders from, investors in the Fund nor does it carry on any other activities with or for such investors that constitute "MiFID or equivalent third country business" for the purposes of the FSA Rules.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS

 


Summary information

 

BH Macro Limited NAVs per share (as at 31 December 2009)

Shares Class

NAV (USD mm)

NAV per Share

USD Shares

695.7

$17.08

EUR Shares

423.2

€17.13

GBP Shares

740.6

1755p


BH Macro Limited NAV per Share*% Monthly Change

USD Shares

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YTD

2007

-

-

0.10

0.90

0.15

2.29

2.56

3.11

5.92

0.03

2.96

0.75

20.27

2008

9.89

6.70

-2.79

-2.48

0.77

2.75

1.13

0.75

-3.13

2.76

3.75

-0.68

20.32

2009

5.06

2.78

1.17

0.13

3.14

-0.86

1.36

0.71

1.55

1.07

0.37

0.37

18.04

 

EUR Shares

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YTD

2007

-

-

0.05

0.70

0.02

2.26

2.43

3.07

5.65

-0.08

2.85

0.69

18.95

2008

9.92

6.68

-2.62

-2.34

0.86

2.84

1.28

0.98

-3.30

2.79

3.91

-0.45

21.65

2009

5.38

2.67

1.32

0.14

3.12

-0.82

1.33

0.71

1.48

1.05

0.35

0.40

18.36

 

GBP Shares

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YTD

2007

-

-

0.11

0.83

0.17

2.28

2.55

3.26

5.92

0.04

3.08

0.89

20.67

2008

10.18

6.85

-2.61

-2.33

0.95

2.91

1.33

1.21

-2.99

2.84

4.23

-0.67

23.25

2009

5.19

2.86

1.18

0.05

3.03

-0.90

1.36

0.66

1.55

1.02

0.40

0.40

18.00


Source: Underlying BHMF NAV data is provided by the Administrator of BHMF, International Fund Services (Ireland) Limited. BH Macro Limited NAV and NAV per Share data is provided by the Fund's Administrator, Northern Trust International Fund Administration Services (Guernsey) Limited. BH Macro Limited NAV per Share % Monthly Change are calculated by BHAM. BH Macro Limited NAV data is unaudited and net of all investment management fees (2% annual management fee and 20% performance fee) and all other fees and expenses payable by BH Macro Limited.  In addition, BHMF is subject to an operational services fee of 50bps per annum.

*NAV performance is provided for information purposes only. Shares in BH Macro Limited do not necessarily trade at a price equal to the prevailing NAV per Share. 

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

FAS 157 Asset Valuation Categorisation1

Brevan Howard Master Fund Limited (the "Master Fund")

Unaudited Estimates as at 31 December 2009

 

 

% of NAV (Gross Market Value)

Level 1

57%

Level 2

43%

Level 3

0%


Source: BHAM

 


1These estimates are unaudited and have been calculated by BHAM using the same methodology as that used for the 2008 audited financial statements of BHMF. These estimates are subject to change.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets;

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

 

 

 

 

 

Annual Manager Review: 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual Investment

Manager Review: 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual

Performance Review: 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 2009 Performance Review

 

Brevan Howard Offshore Management Limited (the "Manager") is the manager of Brevan Howard Master Fund Limited. Gunther Thumann, CEO of Brevan Howard Group Holdings Ltd. ("BHGH"), which is the parent of the Manager, has provided the following year-end update on the Manager's operations:

During 2009, the Manager worked with its investment managers to further strengthen trading talent and the Brevan Howard trading platform commensurate with the growth of assets under management.

All of the open-ended hedge funds managed by the Manager posted positive year-end NAV/share gains as detailed below:

Fund

2009 YTD NAV/share performance (as at 31 December2009)

Brevan Howard Asia Fund Limited Class A USD

6.69%

Brevan Howard Credit Catalyst Fund Limited Class A USD*

16.68%

Brevan Howard Emerging Market Strategies Fund Limited Class A USD

24.94%

Brevan Howard Equity Strategies Equity Strategies Fund Limited Class A USD

5.58%

Brevan Howard Fund Limited Class A USD

18.65%

Brevan Howard Multi-Strategy Fund Limited Class A USD

17.41%

Brevan Howard Strategic Opportunities Feeder Fund Limited Class A USD

15.55%

 

Source: BHAM

*The inception date of Brevan Howard Credit Catalyst Fund Limited Class A USD Shares was 1st August 2009.

 

The closed-ended listed funds managed by the Manager also performed well with BH Macro and BH Global producing NAV returns in their USD share classes of 18.04% and 14.31% respectively during 2009. 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 US$2.850bn under management at year end and are therefore an important part of Brevan Howard's business.

The Manager reported in its last quarterly update that it was considering the establishment of an additional affiliated investment manager in Geneva. Brevan Howard Group Holdings Ltd. has now secured premises in Geneva and it is intended that investment management operations will commence during the course of 2010. BHGH and the Manager believe that the Geneva office will be a valuable addition to their global group of investment managers and will provide access to high quality staff and infrastructure.

The Manager appreciates the continued support of shareholders during 2009. In 2010, it will continue to seek further opportunities to strengthen and diversify its access to talent and resources on a global basis to ensure that all Brevan Howard managed funds remain positioned to exploit trading opportunities.

 

Brevan Howard Asset Management LLP ("BHAM") currently manages the largest allocation of the Master Fund's assets. BHAM's CIO, Alan Howard, has provided the following year end update to the Manager on BHAM's operations:

Although 2009 was somewhat less eventful than 2008 in terms of market activity, it proved to be an equally successful year for BHAM in terms of fund performance and operational improvements.

We have restructured many of the collateral and margin agreements for the Brevan Howard funds so that counterparty risk is no longer a major concern. We have also continued to focus on reducing tail risk by further simplifying exposures and controlling gross and less liquid positions across all of our funds; in the case of Brevan Howard Master Fund Limited the gross size of the securities portfolio did not change materially during the year, and the number of less liquid OTC positions1 came down by 30% (after a fall of 50% in 2008).

As I reported in the September 2009 Shareholder Report, the BHAM investment team was substantially enhanced last summer 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. Both Fabrizio and Mark have already made a significant contribution to our capabilities by broadening the scope of assets we trade and attracting further talent to the firm. Both have fully integrated into BHAM, and in Mark's case it feels as if he had never left our old Credit Suisse team.

There were no material departures in 2009. Jean-Philippe Blochet, one of our founding partners, formally resigned from the firm in December with our good wishes; JP spent most of 2008 on sabbatical and did not trade for the firm during 2009. Although we are always prepared to bring talent into the firm when it is available, I do not anticipate any significant additions or changes to the trading team in the immediate future.

As to the macro outlook, capital markets stabilised at the end of the first quarter of 2009 after a shaky start and risk assets staged a spectacular rally during the rest of the year. 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. However, we continue to believe that the macro environment is highly unstable. I do not think we have ever had a situation where two diametrically opposed potential outcomes, a deflationary bust and an inflationary spiral, can be credibly argued with equal conviction.

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 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. 

This macro background leads us to focus on four broad themes:

·      Higher Volatility:  The "Great Moderation" period saw lower macro and policy volatility. Going forward we believe that there will be a higher volatility macro environment, which is ideally suited to our trading style.

·      "Lower-for-longer" in the US:  According to the Blue Chip consensus forecast, nominal GDP will grow by 4% by the end of 2010.  Nominal growth at such a low level would be among the worst performances witnessed during an expansion.  In many ways, the recovery would still feel like a recession. Under these conditions, it is hard to see how the Fed can begin to raise rates any time soon.

·      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.  Going forward, an important theme for us is the degree of differentiation that will emerge among countries that pursued similar treatments but realized different outcomes. We believe that such differentiation bets are a major opportunity.

·      Emerging Markets:  We believe in 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. 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.

Given these broad trends, and other more specific situations, such as the massive issuance of sovereign debt, we believe that the opportunity set for trading remains exceptionally rich.

As always, all of us at BHAM thank you for your continued support and we remain totally committed to delivering another profitable performance in 2010.

 

 

 

 

 

1BHAM defines less liquid OTC positions as contracts with maturity in excess of 12 months and are related to emerging markets or are non-vanilla in nature

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance by Asset Class

2009 performance comments by asset class (Brevan Howard Master Fund Limited, "BHMF"):

 

 

 

Interest Rates

 

BHMF made gains in interest rate trading across all the main strategies. In particular, BHMF made positive P/L during the first 5 months of 2009 as rates at the short end of the EUR curve declined sharply and yield curves in major markets steepened. BHMF also made profits in volatility trading by being long implied volatility; after initially selling off, implied volatility levels went up in Q2 and remained high for the rest of the year. High levels of realised volatility also helped gamma trading.  Further gains were made in relative value trading via basis swaps and tactical trades in government swap spreads.

 

 

FX

 

BHMF had only limited FX risk during 2009 with an average exposure of below 30% of NAV. BHMF's exposure was mainly driven by directional trades and the dedicated FX books were slightly profitable.

 

 

Equity

 

BHMF's equity risk was small; average gross exposure was below 10% of NAV. Dedicated equity activity made small profits.

 

 

Commodity

 

BHMF's commodity risk was very small in the first part of the year and slightly more significant in the second part, but overall average exposure was below 5%. BHMF's P/L in commodities was roughly flat.

 

 

Credit

 

BHMF had a very successful year in credit trading; the results, given the risk allocated, were exceptional. The returns were mainly driven by relative value trading in the US mortgage market, index directional trades and other high yield opportunities.

 

 

Annual Contribution to Performance

Historic annual contribution (%) to total performance by strategy type (Brevan Howard Fund Limited Class A USD):

 

Year

Total

Macro

EMG

Systematic

Rates

FX

Equity

Comm

Credit

2006

11.1

2.76

2.94

-0.18

5.51

-0.99

0.73

0.19

0.13

2007

25.21

8.78

1.96

-0.04

11.78

3.72

0.28

-0.33

-0.95

2008

20.43

15.36

-1.75

-0.01

5.53

1.59

-0.94

0.63

0.00

2009

18.65

8.05

1.87

-0.07

6.38

0.29

0.32

0.19

1.62

 

Source: BHAM

 

Methodology and definition of Annual Contribution to Performance:

 

Attribution is approximate and has been derived by allocating each trader book in BHMF to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.

 

BHAM's categories are defined as:

 

"Macro": multi-asset global markets, mainly directional (for BHMF, the majority of risk in this category is in rates)

"EMG": global emerging markets

"Systematic": rules-based futures trading

"Rates": developed interest rates markets

"FX": global FX forwards and options

"Equity": global equity markets including indices and other derivatives

"Comm": liquid commodity futures and options

"Credit": corporate and asset-backed indices, bonds and CDS

 

 

 

 

 

 

Monthly VaR by Asset Class

2009 VaR in $mm by asset class as at each month end (Brevan Howard Master Fund Limited):

 

Total

Interest Rates

Vega

FX

Equity

Commodity

Credit


NAV $bn**

Jan

104

88

34

11

15

5

12


20.2

Feb

120

116

33

25

4

9

15


20.3

Mar

104

96

42

16

8

7

14


20.3

Apr

119

89

39

20

24

8

16


18.8

May

167

161

59

40

8

10

15


19.6

Jun

114

91

53

19

15

11

12


19.6

Jul

126

105

60

20

21

6

14


19.9

Aug

124

121

55

29

18

10

14


20.0

Sep

114

97

54

34

21

13

23


20.6

Oct

103

90

51

24

30

22

28


21.3

Nov

106

85

49

40

17

34

29


21.7

Dec

137

107

37

49

53

19

10


22.1

 

Source: BHAM

*Calculated using historical simulation based on a 1 day, 95% confidence interval.

 **This figure is the sum of the NAVs of the feeder funds of Brevan Howard Master Fund Limited plus investments directly in Brevan Howard Master Fund Limited by other funds managed by Brevan Howard Offshore Management Limited.

 

 

 

 

 

 

 

 

 

 

During the month, Brevan Howard Master Fund Limited ("BHMF") made most of its profits for the month in fixed income directional, curve and FX strategies. To a lesser extent, profits were made in equity, credit and fixed income relative value. Small losses were incurred in commodities.

 

Market Review and Outlook

 

The following is a report from Brevan Howard Asset Management LLP, the principal investment manager of Brevan Howard Master Fund Limited:

Market Commentary

US

Last year marked the turning point in the US economy and markets following two dismal years.  Towards the end of 2009, a broad range of economic indicators surprised on the upside, leading us to mark up GDP growth to above 5% for our internal fourth-quarter tracking estimate. Earlier in 2009, during the depths of the panic, a return to such rapid growth seemed improbable. The recent recovery has been led by a rebound in manufacturing, exports and consumer spending. The strength in retail sales has been especially notable in the face of headwinds from slowing wages, a weak housing market and borrowing constraints.

We believe a recovery in the labour market remains the key pre-requisite for a sustainable recovery. For the last few months of 2009, we were looking for some job growth and the preliminary numbers for November hinted at stabilisation.  In the coming months, our view is that there will be modest private-sector job creation which should help sustain the momentum.

Nevertheless, the labour market has been deeply scarred by the recession.  Approximately 7.5 million private-sector jobs were created in the prior expansionary business cycle; and the "Great Recession" of 2008/2009 destroyed almost as many. 

In fact, the level of private-sector employment is currently about the same as it was a decade earlier in 1999.  Even with strong growth, it is going to take a long time to get back to anything resembling normality.

 

Higher energy prices combined with base effects have pushed headline inflation from negative to positive territory in just a few months.  We anticipate headline inflation will peak near 3% before it subsides in the second-half of 2010. Core inflation, however, is very subdued.  Core market-based consumer prices, one of the Fed's preferred measures, is running at an annual rate of less than 1% in the fourth quarter of 2009.  If history is a guide, ample slack in labour, production and the housing markets promises to exert further downward pressure on core inflation going forward.

In our review of 2008 (in the December 2008 Shareholder Report) two reasons for optimism were noted: the Fed and the Obama Administration were fully committed to reviving the economy and markets. In 2009, their extraordinary actions pulled the economy out of recession and led to marked gains in asset prices.  Markets have mended more quickly than thought possible and growth has been better than we had hoped for.  Nevertheless, it remains to be seen in 2010 how well markets and the economy perform as the Fed gradually begins to exit from its extraordinary programmes and fiscal stimulus turns into a net drag on growth.  We expect 2010 to be a challenging and volatile year as the economy tries to maintain momentum in the absence of continued extraordinary policy initiatives.

Europe

At the end of the year economic data confirmed that, after growing by 1.6% q/q (SAAR) in Q3 2009, the EMU activity level is likely to have expanded further in Q4 2009, partly due to the recovery of global demand and the end of the destocking process by EMU firms. At the same time, private consumption has remained broadly flat as consumers took advantage of the car scrapping incentives provided by EMU governments while contracting other types of expenditure. The challenging labour market situation remains a drag on spending with the unemployment rate at the highest level since the launch of the euro. This remains the biggest concern for households in the EMU.

There is a high degree of heterogeneity across the EMU. On the one hand, in Spain the labour market shows renewed weakness with the unemployment rate approaching 20% after a period of stabilisation. On the other hand, in Germany unemployment remains relatively low and is slowly declining due to government subsidies. A divergence in macro developments amongst EMU countries is also evident in fiscal conditions, as Greece remains a challenge for the conduct of a common monetary policy. Looking ahead, we believe that the ongoing recovery in major EMU trading partners and the healthy financial situation of EMU households should be factors underpinning 2010 growth.

Given recent improvements in the financial markets, the ECB decided to start exiting from the liquidity provisions introduced at the height of the crisis at its December meeting. As such, the ECB allotted its last one-year repo operations at a variable rate instead of a fixed rate as in previous occasions. In addition, the ECB reduced the number of term repo operations conducted each month. Whilst normalising its operational framework, the ECB continues to be very cautious about the medium term sustainability of the recovery and its December macro projections depict a gradual economic upswing characterised by the absence of significant inflationary pressures.

UK

The economic recovery in the UK continued in December. Economic activity indicators point to growth in Q4 2009, after some upward revisions to the still-disappointing Q3 2009 GDP numbers. The housing market remains strong with both activity levels and prices continuing to improve although not accelerating any more. Credit markets showed further signs of improvement with bank surveys pointing to an easing of credit conditions, and rising mortgage credit and corporate credit showing tentative signs of a turning point.

The labour market also continued to improve with the stabilisation of the unemployment rate and rising vacancies, paving the way for employment growth in the coming quarters. Although the year-on-year growth rate of inflation has been difficult to interpret due to strong energy base effects and VAT changes, the underlying rate of inflation continues to surprise on the upside and this is likely to persist due to the pass-through from the weakness of GBP. This is attracting the attention of BoE policymakers, some of whom are starting to de-emphasise the role of the output gap as a reliable predictor of inflation and are instead putting more weight on inflation expectations, GDP growth and commodity prices. On the fiscal side, the December Pre-Budget Report showed little change in the near-term deficit forecast and little change in the planned pace of fiscal consolidation by the Labour government. In these circumstances, while the balance of risk has shifted somewhat, the BoE will likely wait for further evidence of a sustainable increase in core inflation before moving rates.

Japan

Japan is currently a tale of two economies. On the one hand, export-oriented large manufacturing firms are performing relatively well, as suggested by the performance of exports, industrial production and surveys such as the manufacturing PMI. These sectors of the economy are dependent on global developments and are benefiting from higher demand especially from Asia and emerging economies. On the other hand, domestically-oriented small firms and households are under renewed pressure, as evidenced by the ongoing weakening of small business and consumer confidence surveys. Indeed, we believe that as the fiscal stimulus diminishes, households will remain under the strain of high unemployment and falling wages, which will stifle their purchasing power.

The result is that the economic recovery, albeit still ongoing, is not strong enough to absorb the huge size of unused resources. As such, deflationary forces on consumer prices keep intensifying as evidenced by available core inflation measures. The BoJ is taking a bolder stance in an attempt to reduce these pressures by potentially weakening the yen, but so far the results have been insufficient.

 

Enquiries

Northern Trust International Fund Administration Services (Guernsey) Limited

Harry Rouillard +44 (0) 1481 74 5315

 

 


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