Macro investors, take note: This will be a very good year
for macro investing. That’s a prediction coming
from Alan Howard, co-founder of Brevan Howard, and
he’s standing by it.
"We’re more optimistic about the opportunity
set for macro trading now than we have been for some time,"
Howard writes in a year-end letter for clients of BH Macro
Ltd., a closed-end fund that invests all its assets in the
ordinary shares of the $27.8 billion Brevan Howard Master Fund,
a global macro hedge fund.
Howard, whose firm manages more than $39 billion in total
assets, observes that the U.S., Europe, China and Japan all
have adopted the same game plan — including unlimited
loose monetary policies and devaluation of their currencies
presumably to boost exports. "In short, the
world’s major central banks are 'all
in’ with very aggressive non-traditional monetary
policy having become the norm," Howard explains, thus
alleviating some of the risk-taking.
At the same time investors no longer seem spooked by dire
predictions of another global financial meltdown caused by a
breakup of the euro, the U.S. fiscal cliff crisis, debt ceiling
and other monetary issues, or a possible hard landing in the
Chinese economy, for example. Over the past two years, whenever
such fears were raised, markets would temporarily tank.
However, last year it became clear that allowing such fears
to drive investment decisions was a losing proposition, as
indices such as the S&P 500 surged 16 percent amid all the
doomsday scenarios. Macro hedge funds, including Brevan Howard,
lagged considerably. BH Macro, for example, was up just 3.8
percent last year. An investor who asked not to be named said
he is disappointed in Brevan Howard’s performance
over the past few years, but says he likes the firm for its
risk management. "Their probability of losing money is slim,"
The HFRI Macro Index fell by 0.40 percent in 2012, driven by
losses in systematic/quantitative CTA strategies. The HFRI
Macro: Systematic Diversified Index lost 2.7 percent in 2012,
thanks to weakness in currencies and commodities.
Even so, investors continued to pour money into these
strategies. According to HFR, macro funds enjoyed net inflows
of $1.66 billion in the fourth quarter and $10.3 billion for
the entire year, boosting total macro hedge fund assets to $488
billion at the end of 2012.
In his letter, Howard asserts that the combination of what
he calls "policy hyperactivity" and investor apathy could spark
a significant and lengthy rally in many capital markets, just
the kind of trend that macro investors love. "Such an outcome
naturally creates a very opportunity-rich environment for macro
trading," Howard says.
However, he does stress the key is to be on the correct side
of these potential moves. Entering the year his portfolio has
assumed more of a "risk on" bias, with a long exposure in
BH Macro’s overall risk level is moderate, he
says. "We remain very tactical in our approach, as we have been
since 2010," Howard adds.
Interestingly, co-founder Chris Rokos, the "R" in Brevan who
left the firm in August, specialized in trading interest rates
at Brevan Howard.
Howard, who is in his late 40s, spent 20 years at Credit
Suisse and predecessor companies. He served as head of interest
rates derivatives trading at CS First Boston. He spun out
Brevan Howard from Credit Suisse in 2002 after CEO John Mack
tried to cut his pay.
His firm has generally fared well relative to peers. In
2011, when the average hedge fund lost money, Brevan Howard
enjoyed a 12 percent return. And in 2008, it posted a 20.32
percent gain while many hedge fund managers were showing
In 2012 the fund’s gains came mainly from
interest rate and credit trading, but these were offset by
trades structured for a low-risk environment. The fund was in
the red at the end of June, but it rallied in the second half
and was profitable by year-end.
While Howard believes the kind of "tail risks" that have
plagued the markets for the past five years appear to be
dissipating, Howard argues in his report: "I continue to
believe that it is imperative to maintain risk management
discipline and to be continuously mindful of the potential for
renewed systemic stress."