Interesting Developments at BH Macro

The hedge fund BH Macro (LON: BHMG) has just released an impressive set of results with the sterling share class making an NAV total return of 21.9% in 2022. It is a unique vehicle that is able to benefit from conditions in which most funds would struggle, thereby making it an excellent diversifying holding.

BHMG invests directly in the Brevan Howard Master Fund, a hedge fund with the objective of generating consistent long-term appreciation through active leveraged trading and investment on a global basis. The conditions last year were ideal, with elevated levels of volatility across a range of markets creating a fertile environment for the traders to exploit.

The fund provides exposure to a range of macro trading strategies including interest rates, fixed income and FX, with the 100 or so traders looking for positions that have asymmetric pay-off profiles with more upside than downside. It consistently does well in volatile markets, in particular in 2020 and 2022, although in quieter conditions the returns tend to be fairly dull.

Last year’s performance was mainly driven by interest rates, particularly in the first six months, as the fund was positioned for its core theme of higher US rates. When sentiment shifted in the final quarter towards the possibility of an end to the rate-hiking cycle in America and concerns about a recession in Europe, it was able to generate additional gains by positioning for lower rates.

Outlook

Writing in the accounts the manager said that at the beginning of 2023, investors were willing to believe in a soft landing, but by the end of the first quarter the issues in the banking sector had highlighted that the most interest rate sensitive sectors are in for a rough time. He says that it is unclear whether policy makers have the macro tools to reassure financial markets, while simultaneously using monetary policy tools to tame inflation.

The broker Numis believes that BH Macro is an attractive risk diversifier with the scope to provide portfolio protection in weak equity/credit markets. They say that it has the potential to deliver consistent NAV returns, with low volatility and little correlation to global stock markets.

There have however been some interesting developments in recent weeks that anyone considering investing needs to be aware of. The first of these is a sharp drop in performance following the failure of the Silicon Valley Bank (SVB) with the NAV of the sterling shares down by 3.06% year-to-date.

Additional Complications

BHMG does not provide commentary with its weekly NAV updates so it is impossible to know what happened, although Bloomberg reports that Brevan Howard has grounded three of its traders to stem the losses caused by bond market volatility in the wake of the collapse of SVB.

For most of last year the shares consistently traded at a large premium to NAV, but the drop off in performance and significant share issue in February has reduced this to around two percent, which represents a decent buying opportunity if you think the market volatility is likely to continue. It is not cheap though with a management fee of two percent per annum on top of a 20% performance fee.

Another issue to be aware of is that the forthcoming merger of wealth managers Rathbones and Investec will leave the enlarged group with a combined stake of 35.4% of the voting rights in BHMG. Obviously they will not want to harm clients by reducing the position too quickly, but there is clearly a stock overhang that could dilute the potential shareholder returns over the next few months.