Potential Discount Opportunity At BH Macro

The last time that I looked at the £1.6bn listed hedge fund BH Macro (LON: BHMG) was back in April and since then there have been some further interesting developments that warrant closer examination. The most notable of these is a very unusual widening of the discount that could potentially offer an attractive buying opportunity.

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 high levels of volatility across a range of markets creating a fertile environment for the traders to exploit, hence the impressive NAV total return of 21.9%.

The Master 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.

Unusually Wide Discount

In recent years BH Macro has tended to trade at a premium to NAV and this enabled the Board to issue new shares, a process which culminated in a significant capital event that raised £315m in February. Since then however everything seems to have gone downhill.

The first problem was that the performance fell off a cliff with an NAV decline of 4.29% for the sterling share class in March, making it the fund’s worst ever month. Year-to-date the NAV total return is -5.24%, which is pretty poor, so it is not that surprising that the shares have slipped to an exceptionally wide discount of 12%.

A contributory factor could be the forthcoming merger of wealth managers Rathbones and Investec that will leave the enlarged group with a combined stake of more than 30% of the voting rights in BHMG. It is possible that the firm will look to reduce this over time, although holdings data from Killik & Co suggests that it is other institutional selling that has resulted in the weak share price.

The obvious way for the discount to narrow is if the demand for the shares picks up following an improvement in the performance, which often happens with BHMG when risk assets suffer a sharp sell-off. Otherwise there are steps that the Board can take to remedy the situation.

Will The Board Act On 13 September?

The final accounts for 2022 describe the powers that the Board have to step in and remedy the situation using the discount management programme.This includes the ability to make market purchases of its shares funded by redeeming underlying shares in the Master Fund.

“BH Macro is entitled to redeem upon three months’ notice no more than once per year, a portion of its interest in the Master Fund representing up to 10% of each class of the company’s holding of Master Fund Shares.”

Also, “if any class of shares trades at an average discount of eight percent or more of the monthly NAV in any calendar year, the company would hold a class closure vote of the relevant class.”

It is possible that the Board will make some kind of announcement about this at the AGM that is scheduled for September 13. I would have thought that any indication of an active response would be welcomed by the market, as would an improvement in the performance, either of which could be enough to see the discount tighten quite considerably.