Is Brevan Howard Macro a good investment?

The closed-ended nature of investment trusts makes them perfectly suited to holding alternative assets, such as infrastructure, real estate or private equity investments. These assets are not usually available to private investors, but they are via the investment trust structure. This allows smaller investors to diversify their portfolios into different asset classes with an initial investment of just a few hundred pounds (compared with the hundreds of millions usually required to invest directly).

With their fixed pool of capital, investment trusts are also perfectly suited to holding portfolios of liquid investments following alternative strategies. Unlike open-ended funds, which have to buy and sell investments to match daily cash flows, trusts always have a fixed pool of capital, giving managers flexibility to pursue differentiated strategies that might take time to pay off.

Several trusts have taken advantage of this quality with great results. The so-called capital preservation trusts, the likes of Capital Gearing, Ruffer, Personal Assets and RIT Capital, own diverse portfolios of traditional, non-traditional and esoteric assets, all held with the overarching goal of generating positive returns for investors throughout the market cycle. BH Macro (LSE: BHMG) takes the strategy one step further. BH Macro falls into the “hedge fund” sector of investment trusts. It has one investment, the units of the Brevan Howard Master Fund.

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Brevan Howard: a global player

Brevan Howard is one of the world’s largest and most successful hedge funds. Founded in 2002 by Alan Howard, Brevan Howard manages around $34 billion today across multiple funds. Since inception, the funds have produced $28.5 billion in profits for investors. The flagship Brevan Howard Master fund looks after $12 billion for clients.

The firm follows a “macro” strategy. Macro hedge funds make money by betting on the economy and interest rates through bonds, foreign exchange (FX), commodities and equities markets. They often have multiple teams of traders placing hundreds, if not thousands, of bets on the markets daily. The overarching goal of most macro hedge funds is to generate positive absolute returns in all market environments.

As BH Macro is a direct owner of Brevan Howard Master Fund units, it’s one of the only ways the average investor can access this exclusive fund. Richard Horlick, chair of BH Macro, says, “BH Macro has historically produced strong returns that have had very low structural correlation to equity and bond markets,” mirroring its investment in the master fund. The investment trust “aims to deliver steady returns like a flight of stairs”.

And that’s just what it has done. Since its inception, the trust has produced a net asset value (NAV) return of 8.8%, with little volatility. As Horlick explains, Brevan Howard’s traders are looking for positions with “convexity of returns” – that is “multiples of upside compared to limited downside”. It has “a large number of portfolio managers with diversified trading mandates”, and the “Brevan Howard Master Fund does not follow one set ‘house view’ in terms of economic narrative”.

There’s also a strict risk management framework that overlays the portfolio managers and their traders. The hedge fund employs “a sophisticated risk-management system looking at thousands of trades and risks”, Horlick explains.

Managing such a sophisticated trading system costs more than the average investment trust. Hedge funds typically charge a 2% management fee and a 20% performance fee, although BH Macro has a unique fee deal with the hedge fund. It pays a 1.5% management fee, a 0.5% administration fee and then a 20% performance fee.

This means fees vary from year to year, but the investment managers have an incentive to perform. The trust’s 8.8% annual return is presented after fees, so it’s difficult to argue the managers aren’t earning their money. BH Macro will not be suitable for all investors. However, the trust’s 11% discount to NAV offers an opportunity to buy into one of the world’s leading hedge funds and build diversification into a portfolio.

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