The runaway champion of the current market turbulence has been the Brevan Howard fund called BH Macro (LSE: BHMG), which is up 20% in share-price terms year-to-date. Its returns are so good that it has left traditional defensive funds such as Personal Assets (down 5%), Ruffer Investment Company (up 4.5%) and Capital Gearing (up 5.4%) in the dust.
To be fair, this trio are fundamentally unlike BH Macro: they are multi-asset investors who use fairly conventional holdings (stocks, bonds and other trusts) defensively – although they have also been known to use esoteric strategies at times – while BH Macro is a full-blooded hedge fund.
BH Macro is also very different from other listed hedge funds, such as Pershing Square Holdings and Third Point Investors, which are down 8% and 13% (in sterling terms – Third Point is priced in US dollars) respectively. These two are classic long-short equity outfits, while BH Macro is something very different: a macro hedge fund.
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BH Macro – a hedge fund betting on volatility
In simple terms, BH Macro invests in a range of macro trading strategies, including interest rates, fixed income and currencies. It seeks “trades that have an asymmetric pay-off profile” and is consistently “positioned long-volatility”, as analysts at Numis put it.
What that means in practice is trading deep, liquid markets where there’s substantial volatility and turbulence can lead to large and small pricing differentials that macro traders can capitalise on. These trades often involve leverage, but outfits such as BH Macro tend to have strict risk control measures in place to dampen down risk.
In summary, this isn’t a “bet the bank on one big trade” strategy, although outsized returns can be made from a single event. The key for investors is that this kind of strategy can be a classic hedge – ie, it can make you profits when nearly everyone else is losing money.
Fund analysts at Investec have compared returns for BH Macro to a broad equities index during six periods of volatility from 2008 to date. “The inverse correlation between BH Macro and global equities was most pronounced in periods of extreme weakness,” they say. “Performance is typically muted during risk-on periods where volatility is muted and interest rates low and stable. However, in more volatile markets, the fund has delivered the strong returns that investors would be hoping for.”
Of course, plenty of other hedge funds have promised this and failed to deliver. The HFRX Global Hedge Fund index is down 4.19% this year and up just 3.2% over 36 months. But BH Macro is delivering to date, and there’s some reason for thinking that it might continue.
A new regime will be good for macro hedge-fund managers
We are clearly moving from one regime of political and economic management to another: from low interest rates, massive liquidity and bumper returns for growth stocks to structurally higher inflation, interest rates and fiscal deficits. It’s a fair bet that there will be more spikes in volatility and each of these spikes offers opportunity for the right managers who can get ahead of big macro policy moves (as with sterling and gilts in the last couple of weeks).
The big risk is that macro hedge-fund managers who’ve survived the last decade will either miss the big shifts or make reckless bets that blow up the fund. Still, BH Macro seems to have avoided those kinds of disasters. Another more specific risk for this trust is that it trades at a beefy 10% premium to net asset value and this might decline if markets start to stabilise, creating a double whammy of a lower premium and lower returns from less volatile markets. That is a distinct risk but not one I see as likely now.
So, even though BH Macro has had a great crisis so far, there’s no reason why it can’t still be a useful component of any defensive portfolio. That’s why I hold it as I wait for the next bull market to emerge.
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