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,” he says.
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 interest rates.
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 double-digit losses.
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.”