The comeback of Brevan Howard?

We were pleased to see Brevan Howard posting strong gains on the back of returning volatility in fixed income markets. The fund was up over 5% for the month. The listed shares gained more than 10%. Many had given up on Brevan’s capacity to make money and assets had come down from 28bln to 13bln. We continued to believe in the fund’s ability to achieve strong risk-adjusted returns, understanding that it would probably require a pickup in interest rate volatility. With this condition now fulfilled, we expect them to continue to do well.

Brevan Howard was founded in 2002 by Credit Suisse’s star trader Alan Howard together with four of his key lieutenants. The fund specializes in Global Macro investing, and within the strategy is recognized worldwide as a leading expert in (especially short-term) fixed income trading. Portfolio construction and risk management at Brevan Howard have always been world class and they are one of very few funds that have consistently provided a long volatility profile while making decent absolute returns. The attractiveness of a long volatility profile is that in times of market stress, when volatility rises, the fund tends to post its best results. The other side of that is that in periods of compressed volatility – which applied to fixed income markets in extremis over the last few years – the fund has difficulties generating strong results.

The listed shares

One thing we did do was to switch part of our investment into the closed-end London listed shareclass. In line with disappointing performance the discount in these shares widened to more than 10%, which is the level at which the manager contractually will buy back shares if the discount stays there for a certain time-period. This way we added additional upside to our position, in our view with very little downside risk. In November the company announced to tender for 100% of the listed shares and we made over 10% on this part of the allocation.

Lower fees

Like several other Legends, Brevan Howard has recently improved the terms for its investors. Specifically, we are not paying any management fees over any capital gains the fund makes from September 30th, or any capital we add to the fund (maxed out at our September 30th balance). With the growth of Legends Fund and strong returns by Brevan Howard this over time will result in us paying about half the old management fees.

Strong outlook after Trump election

With other legendary traders such as Louis Moore Bacon and Paul Tudor Jones, Alan Howard is part of a very select elite group of macro managers who combine superior research with superior implementation and risk management. All three managers have struggled to post meaningful absolute return over the 2014-2016 period. Louis Moore Bacon and Paul Tudor Jones have both come out with letters that the election of Trump is a complete game changer for global macro investing and they expect trading opportunities to be as good as they have been in the early ‘00s. Alan Howard has not (yet) sent out such a letter.

The fact that the fund is much smaller today than even at its most recent glory days in 2007-2009 should only help them to capitalize on the trading opportunities at hand.