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The coordinated efforts of the world’s central banks to reduce interest rates in the wake of the financial crisis created a supportive environment for risk assets and historically low levels of volatility. With the emphasis shifting to monetary tightening, it looks like this period of benign returns is beginning to break down and it is possible that one of the main beneficiaries could be the London-listed hedge fund BH Global (LON:BHGG).
BH Global invests all of its assets in the Brevan Howard Multi-Strategy Master Fund, which allocates the capital to various Brevan Howard hedge funds, as well as individual traders affiliated to the company via its Direct Investment Portfolio. This enables it to profit from a range of different trading styles in areas such as macro strategies, systematic trends, interest rates, credit and foreign exchange.
The managers have recently highlighted the increasing dispersion of returns amongst the advanced and emerging markets. A lot of this is a result of higher interest rates in the US, which have boosted the value of the dollar and put pressure on the most vulnerable emerging-market economies. They also drew attention to the fact that trade tensions are rising and that there is no clear indication of what sort of impact the higher tariffs will have on the global economy and financial markets.
There has already been a significant improvement in the performance
This is just the sort of environment in which funds like BH Global can thrive and there has already been a significant improvement in the performance, with the NAV of the sterling share class rising 5.5% in the first six months of the year. The Direct Investment Portfolio and the Brevan Howard Master Fund both did especially well, with most of the gains coming from directional and relative value trading in interest rates.
There was a further boost to investors from a narrowing of the discount. After a prolonged period of dull performance, the shares started the financial year on a discount to NAV of 11%, but that has now tightened to 4% due to the improvement in the performance and numerous share buybacks.
Its sister fund BH Macro (LON:BHMG), whichinvests all of its assets in the Brevan Howard Master Fund, has also seen a similar improvement in performance. In the first six months of the year the NAV total return of the sterling share class was 8.7%, whereas in the previous six years the equivalent figure was just 7.8%.
A more profitable environment
The growing political and economic uncertainties and the consequent increase in volatility of the various asset prices has created a more profitable environment for the global absolute return managers that the fund invests in, yet the shares still trade on an 8% discount to NAV.
Canaccord Genuity has recently reiterated its ‘Buy’ rating on both BH Global and BH Macro on account of their ability to improve portfolio diversification. The broker points out that the inverse correlation with equities at times of distress could have significant value in a risk-off environment.
If we experience a sharp market sell-off there is a good chance that it will engulf most traditional equity and bond funds, with hedge funds like BHGG and BHMG offering one of the few sources of positive returns. The main downside is the high cost that detracts from the performance during more benign periods with the ongoing charges being 2.86% and 2.72% respectively.