Monthly Shareholder Report - December 2013
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BH MACRO LIMITED MONTHLY SHAREHOLDER REPORT: CONFIDENTIAL DO NOT COPY OR DISTRIBUTE
Your attention is drawn to the disclaimer at the beginning and end of this document © Brevan Howard (2014). All Rights Reserved. |
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Important Legal Information and Disclaimer BH Macro Limited ("BHM") is a feeder fund investing in Brevan Howard Master Fund Limited (the "Fund"). Brevan Howard Asset Management LLP ("BHAM") and Brevan Howard Capital Management LP (together with BHAM, "Brevan Howard") have supplied the information herein regarding BHM's and the Fund's performance and outlook. BHAM is authorised and regulated by the Financial Conduct Authority (the "FCA") in the United Kingdom. This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 and the handbook of rules and guidance issued from time to time by the FCA (the "FCA Rules"). The material relating to BHM and the Fund included in this report has been prepared by Brevan Howard and is provided for information purposes only and does not constitute an invitation or offer to subscribe for or purchase shares in BHM or the Fund. This material is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material relating to BHM and the Fund have been obtained or derived from sources believed by Brevan Howard to be reliable, but Brevan Howard makes no representation as to their accuracy or completeness. Any estimates may be subject to error and significant fluctuation, especially during periods of high market volatility or disruption. Any estimates should be taken as indicative values only and no reliance should be placed on them. Estimated results, performance or achievements may materially differ from any actual results, performance or achievements. Except as required by applicable law, BHM, the Fund and Brevan Howard expressly disclaim any obligations to update or revise such estimates to reflect any change in expectations, new information, subsequent events or otherwise. All investments are subject to risk. Prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decisions. Tax treatment depends on the individual circumstances of each investor in BHM and may be subject to change in the future. Returns may increase or decrease as a result of currency fluctuations. You should note that, if you invest in BHM, your capital will be at risk and you may therefore lose some or all of any amount that you choose to invest. This material is not intended to constitute, and should not be construed as, investment advice. Potential investors in BHM should seek their own independent financial advice. BHAM neither provides investment advice to, nor receives and transmits orders from, investors in the funds to which this material relates nor does it carry on any other activities with or for such investors that constitute "MiFID or equivalent third country business" for the purposes of the FCA Rules. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS
BMANL20131231 |
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BH Macro Limited Manager: Brevan Howard Capital Management LP ("BHCM") Administrator: Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust") Corporate Broker: J.P. Morgan Securities Ltd. Listings: London Stock Exchange (Premium Listing) NASDAQ Dubai - USD Class (Secondary listing) Bermuda Stock Exchange (Secondary listing) |
Overview BH Macro Limited ("BHM") is a closed-ended investment company, registered and incorporated in Guernsey on 17 January 2007 (Registration Number: 46235). BHM invests all of its assets (net of short-term working capital) in the ordinary shares of Brevan Howard Master Fund Limited (the "Fund"). BHM was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 14 March 2007.
Total Assets $2,245 mm1,2 1. Estimated as at 31 December 2013 by BHM's administrator, Northern Trust. 2. This figure is net of the 2013 capital return. |
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Summary Information |
BH Macro Limited NAV per Share (estimated as at 31 December 2013)
BH Macro Limited NAV per Share % Monthly Change
Source: Fund NAV data is provided by the administrator of the Fund, International Fund Services (Ireland) Limited. BHM NAV and NAV per Share data is provided by BHM's administrator, Northern Trust. BHM NAV per Share % Monthly Change is calculated by Brevan Howard. BHM NAV data is unaudited and net of all investment management fees (2% annual management fee and 20% performance fee) and all other fees and expenses payable by BHM. In addition, the Fund is subject to an operational services fee of 50bps per annum. NAV performance is provided for information purposes only. Shares in BHM do not necessarily trade at a price equal to the prevailing NAV per Share. *Estimated as at 31 December 2013 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS |
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ASC 820 Asset Valuation Categorisation* |
Brevan Howard Master Fund Limited Unaudited Estimates as at 31 December 2013
Source: Brevan Howard * These estimates are unaudited and have been calculated by Brevan Howard using the same methodology as that used in the most recent audited financial statements of the Fund. These estimates are subject to change. Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets. Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.
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Annual Manager Review: 2013 |
Manager Update - Brevan Howard Capital Management LP Brevan Howard Capital Management LP (the "Manager") is the parent and Alternative Investment Fund Manager ("AIFM") of Brevan Howard's global group and is responsible for overseeing all investment management activities globally. During 2013, the Manager worked on a number of key initiatives to further strengthen our global investment management operations. First, we sought to consolidate and centralise a number of our operational control functions in one location, leading to an expansion of our operations in Jersey. As at 31 December 2013, the Manager employs around 50 staff in Jersey across a number of key functions. Second, we expanded our trading teams in New York and Hong Kong with both locations taking on significant new trading talent during the course of the year. These new additions have led to a more diversified trading and support team and has improved Brevan Howard's ability to exploit trading opportunities in multiple asset classes, markets and regions. Third, we consolidated our global marketing and investor relations functions by formally integrating the previously stand-alone North-American operations into the Brevan Howard group. This change has allowed for the integration of client servicing resources and systems globally, thereby improving the tools available to our 40 strong investor relations and marketing team to service fund investors. Brevan Howard now manages approximately $40bn making it the largest hedge fund manager in Europe and one of the largest in the world. We manage these assets across a number of trading funds, including among others, the following:
We thank investors for their ongoing support and reaffirm our commitment to running an industry-leading investment management platform that can generate consistent NAV returns for investors whilst at the same time protecting them from significant downside risks. |
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Annual Investment Manager Review: 2013 |
BH Macro Limited (USD Shares) ended 2013 up an estimated 2.61%, a somewhat disappointing performance given the strong gains made in the first four months of the year. Unusually for the Fund, interest rate trading was the main detractor, while trading in equity markets and foreign exchange provided positive returns. During the year, the Fund's performance was predominantly driven by three major themes. The first theme was long the "Japan Trade", namely the view that under Prime Minister Abe's stewardship policymakers in Japan were finally committed to taking extraordinary measures in order to reflate their economy. As a consequence, we were long Japanese equity indices and short the Yen. The second theme focused on the US recovery. Believing that the US economy would outperform its trading partners and that the Federal Reserve would start to move towards reducing its extraordinarily accommodative policy stance at some point in 2013, we went long the USD vs a basket of other currencies. The final major theme was that Europe's ongoing disinflationary pressures would force the ECB to cut rates, potentially through the zero bound, which led us to be aggressively long European interest rates. Over the first few months of the year, Japanese equities rallied sharply and the Yen sold off, while the USD appreciated against its trade weighted basket. The European interest rate position proved to be more volatile, with short term interest rates initially rising sharply in January before resuming their downward path through to early May. The net result of these asset price moves was an appreciation in the Fund's NAV of over 7% by the end of April. During the latter part of May however, a combination of stronger than expected U.S. April employment data and Chairman Bernanke's talk about the possibility that the Fed may taper asset purchases triggered substantial turmoil in financial markets that lasted several months. Trends reversed violently as market participants cut risk across multiple asset classes and the Fund gave back a significant portion of its gains during the period from late May to the end of October. For the year as a whole, the Fund made money on the "Japan Trade" and the long USD trade despite the summer drawdown, the long European rates position proving to be the only net loser of our three major themes. While the reversals we suffered in the second half of the year are disappointing, I believe that in order to make outsized returns it is essential to 'press' winning themes. This trading style of pressing winning themes served us well in 07, 08 and 09 when we delivered returns of around 20% p.a. for three consecutive years and, more recently, another 15.7% return for the 10 months from July 2012 to April 2013; but proved problematic during the latter part of 2013 when trends suddenly reversed. Going forward, we will continue to 'press' winners, but recognise that we must also focus on better protecting gains. As I have written in previous letters, we have taken the opportunity to hire a significant number of seasoned traders from banks following the introduction of much tighter regulatory constraints on their ability to take proprietary risk. In 2013 we consolidated the trading team after a long period of growth and now have a stable core of exceptional trading talent. I am pleased to report that the traders we recruited during this recent period have once again made a very material contribution to returns, re-affirming the value added in building our trading capabilities over these past few years. I expect that we will continue to hire selectively in 2014. As we look forward to 2014, we see many of the themes we identified at the start of last year as still valid. Japanese authorities remain determined to reflate the Japanese economy and, even if they eventually fail, will take extraordinary steps in an attempt to achieve this goal. What is possibly different this time is that Prime Minister Abe has a clear mandate to pursue his policies. At the same time, BOJ Governor Kuroda has accepted the Fed's strategy of influencing real economy outcomes through the transmission mechanism of higher asset prices and the promise of prolonged zero to negative real yields. On that basis it is unlikely that the BOJ and Japanese policymakers will simply stop at what has been achieved, which is not very much relative to their goals, and just accept no further progress in terms of economic growth, higher asset prices and higher inflation. We expect further policy actions which may cause significant moves in Japanese equity indices, the Yen and later perhaps even JGB's. The long European rates trade also seems to offer potential. The ECB was under little pressure to take action in 2013 because of a gradual improvement in Eurozone economic sentiment and data. We believe that part of this improvement was due to a reduction of fiscal drag for most European governments as 2013 marked a pause in Eurozone governments' attempts to pursue additional austerity or to address budget deficits. However, as the fundamental fiscal imbalances have not yet been resolved, it is likely that the fiscal stance will become more restrictive in 2014, which may lead prospects for growth to deteriorate in the latter part of the year. Should the current disinflationary pressures in Europe persist, the ECB will have to take more aggressive monetary action. Now that the Fed has finally started to exit its extraordinary asset purchase programme in the US, we would expect the opportunity set to trade both US rates and the US dollar to markedly improve. The one way bet on Fed accommodation since 2008 has made trading the US dollar and US rates a frustrating exercise for the last several years. Fed policy is no longer a one way bet and the fact that the interest rate curve is as steep as it has been for decades demonstrates the broad range of expectations about future policy. As events unfold, we expect the volatility and trading ranges for both the dollar and rates to expand materially, providing opportunities to take advantage of significant two-way moves in price, curve shape and option volatility. We are looking forward to an opportunity rich year for rates trading in 2014. I want to thank our investors, as I do each year, for their continued support and confidence. None of us at Brevan Howard take that support for granted. We are all fully aware that 2013 was a disappointing year in terms of returns and we are determined to deliver a more satisfactory outcome for 2014. Yours sincerely,
Alan Howard |
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Annual Performance Review: 2013 |
Performance by Asset Class 2013 performance comments by asset class for the Fund
Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class
Monthly, quarterly and annual figures are estimated by Brevan Howard as at 31 December 2013, based on performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Monthly VaR of the Fund by asset class as a % of total VaR*
Source: Brevan Howard. Data estimated as at 31 December 2013. * Calculated using historical simulation based on 1 day, 95% confidence interval.
Performance by Strategy Group Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group
Monthly, quarterly and annual figures are estimated by Brevan Howard as at 31 December 2013, based on total performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited.
Methodology and Definition of Monthly Contribution to Performance: Attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.
The above strategies are categorised as follows: "Macro": multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates) "Rates": developed interest rates markets "FX": global FX forwards and options "EMG": global emerging markets "Equity": global equity markets including indices and other derivatives "Commodity": liquid commodity futures and options "Credit": corporate and asset-backed indices, bonds and CDS "Systematic": rules-based futures trading |
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Performance Review |
During the month, the Fund made profits mainly in FX trading and in equity macro trading, a good proportion of which were related to Japan. Small losses were suffered in EUR interest rate trading.
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Market Review and Outlook |
Market Commentary US As the year drew to a close, data suggested that the expansion is strengthening in the US. Smoothing through the ups and downs caused by inventory accumulation, private final demand appears to have grown at an annualised rate of approximately 3% in the second half of 2013. Interest-rate sensitive sectors are pacing the expansion, with outlays on motor vehicles reaching new highs and housing bouncing back after having digested the increase in mortgage rates seen earlier in 2013. Forward-looking indicators of consumer and business spending have firmed and the fiscal drag is waning - developments that point to solid economic growth in 2014. Job gains have been impressive with the average monthly increase being nearly 200,000 over the last three months. The unemployment rate is 7.0%, although that figure overstates the improvement in the labour market since most of the recent decline is attributable to falling participation. Inflation remains subdued. Headline prices are rising slowly because food and energy prices are soft. Core inflation is stuck around 1%, reflecting tame input prices as well as disinflation in medical goods and services. As some of the temporary factors holding down inflation dissipate and the economy grows above trend, inflation should begin to slowly move up. Washington finally declared a truce in the budget wars, after lurching from one crisis to the next since 2011. Congress passed a budget which relaxed the sequester budget caps, reduced the fiscal drag a little in the short run, and promised no Government shutdowns until at least 2015. Meanwhile, the Federal Reserve finally started the beginning of the end of unconventional monetary policy. The Fed cut its asset purchases by $10 billion per month and set the programme on autopilot to end in late 2014. At the same time, the Fed promised easy monetary policy "well past" the time that the unemployment rate declines below 6.5%. At the end of 2012, we figured 2013 would bear a resemblance to 2012 despite the improved environment for risk taking and certain strong sectors of private demand. That turned out to be a fair description of how the year played out. In 2014, the economy should be even better and the environment for taking risk should still be favourable.
EMU The euro area economy ended 2013 in a marginally better shape than it did the year before. The cyclical situation has improved, with most economies exiting the recession and both business and consumer sentiment improving steadily since the second quarter last year, with the notable exception of France which continues to send mixed signals. The downside of the reduced fiscal effort and ongoing low growth rates has been a further increase in debt-to-GDP ratios, although at current low yields the debt servicing costs remain manageable. The fiscal drag has been easing, but the unemployment rate remains at very high levels and still rising in large countries such as Italy. Along with a significant output gap, inflation rates remain very subdued, way below the ECB definition of price stability, and the number of peripheral countries experiencing deflation is increasing. In response to the declining level of inflation, monetary policy was further eased in November 2013, with unprecedented low interest rates supported by forward guidance, an easing bias and an extension of the full allotment policy until mid-2015. On the institutional side, the key development has been progress in the key elements of the banking union which foresees common bank supervision and resolution regimes to start being phased in from 2014. The process will be preceded by an asset quality review and stress test for the largest 130 banks, to be completed in the third quarter of 2014. Another challenge for the New Year will be how the ECB will credibly manage the conflict that is created by its two policy objectives, price stability and banking supervision. In the current low inflation environment, the former may require further additional policy accommodation measures. The latter will require the ECB to show a tough stance on the banks from the beginning, in order to make sure the common supervision is started on a clean page, forcing banks to pay attention to the risk exposures on their balance sheets. The failure of the EU leaders to agree on an unconditional common fiscal backstop for failing banks will make this task even more challenging. The nexus of the conflict between tight supervision and loose monetary policy will show itself in bank lending which continues to contract at the euro area level and, if the flow of credit to creditworthy borrowers also starts to dry up, this could dampen the nascent economic recovery in several countries. The political landscape in the euro area will see important municipal elections in France in March, the elections for the European Parliament in May and possibly parliamentary elections in Italy. All these elections could potentially de-stabilise the political environment in the euro area in the short term.
UK The ongoing theme in the UK data is strong growth with weak inflation. GDP growth has accelerated to a 3-3.5% pace in the second and third quarters of 2013, and monthly survey indicators over the past months have levelled out or eased back only slightly from the very high peaks reached around September 2013. The housing market continues to show strength, as lending and transactions are picking up and price increases continue at around a 10% annualised pace. Residential construction has already been rising in excess of 10% annualised, a pace which is expected to continue. However, consumption growth has risen far ahead of its fundamentals, and looks vulnerable. Accelerating consumption in 2012 and the first half of 2013 took place despite broadly flat real income. Instead, it was supported largely by a fall in the savings rate. Business investment is improving, mitigating some of the drag from slower consumption in the second half of 2013. Net exports are contributing close to zero, and fiscal austerity is forecast to be somewhat more of a drag in 2014 than in 2013. Inflation, meanwhile, remains benign and continues to surprise the Bank of England ("BoE") on the downside. Headline inflation has fallen to 2.1%, core is at 1.8% (both at the lowest since 2009) and wage inflation is below 1% (lowest on record). The strong GDP growth in recent quarters has been accompanied by rapid employment growth and rapidly falling unemployment. The 7% forward guidance unemployment threshold is likely to be reached much sooner than the BoE had expected. This leads to two challenges: first, the BoE has to explain why employment has been so strong. It is not consistent, so far, with a productivity-based recovery (which would imply lots of GDP, not much employment growth). The hawkish argument is that there is less slack than previously thought, so the period of low rates should end sooner than expected. The dovish argument is that the employment strength is temporary, and will ease soon, so the period of low rates can continue for a prolonged period. The second challenge is that the BoE needs to decide what, if anything, will replace the current forward guidance framework. They could lower the unemployment rate threshold to 6.5%, or formulate a new threshold based on wage inflation or unit labour costs, in order to keep rate expectations anchored. Or policy communication could simply revert to normal: acknowledging that forward guidance is indeed about to expire, but pointing out that low wage inflation and CPI close to target mean that rates can remain on hold for some time, without putting quantitative time horizons or data conditionalities on the future policy rate path.
Japan In Japan, it seems that everyone is killing time until the effects of the consumption tax hike come into focus. The Bank of Japan's asset purchases continue apace, but further monetary accommodation awaits some shift in inflation trends. On that score, prices excluding food and energy, the so-called Western core measure, rose 0.2% in November. The average pace of modest price increases that started earlier in 2013 continues, though there isn't a signal in the data that this pace is moving up. Forward-looking indicators are a little more supportive. Consumer inflation expectations were little changed in the latest reading, but after having run up over 2013, inflation expectations are at a relatively high level. The yen resumed its depreciation against the dollar in early November and has moved over 104 to the dollar. The cabinet approved the proposed budget announced earlier in 2013. As we have noted before, the temporary measures to cushion the drag from the consumption tax hike are likely to have mixed success. Otherwise, the Government's focus has been on domestic and international security measures while making little further progress on economic structural reform. The direction of the latest survey data on the economy was somewhat mixed, but the levels all remain relatively high in comparison to recent years. The quarterly Tankan survey moved up further, while the Shoko-Chukin survey of small and medium-sized enterprises slipped a little for January. Consumer confidence bounced back a bit from a noticeable drop in October, though in this particular case is below the levels seen in the first half of 2013.
China December data showed a clear slowdown in the Chinese economy. The official manufacturing PMI fell 0.4 points to 51.0 in December, with a broad-based decline as 11 out of 12 sub-indexes fell. The HSBC China manufacturing PMI fell as well. Official service PMI dropped by a large 1.6 points to 52.5, the lowest level since August 2013, while the HSBC services PMI fell by 1.6 points to 50.9, the lowest level since August 2011. The slowdown is likely to carry into the first quarter of 2014. The current CPI inflation is still mild and in December, the CPI eased sharply thanks to a less than seasonal rise in food prices and a high comparison base, while PPI remained in deflation. However, property prices kept rising, as new home prices in 100 cities rose by another 0.70% m/m, the 19th consecutive month. The People's Bank of China reacted quickly to the renewed cash crush in the interbank money market in the second half of December, conducting short-term liquidity and reserve repurchase agreement operations to inject liquidity. As a consequence, money market rates dropped sharply. The 2014 policy targets for GDP, CPI and M2 are likely to be kept unchanged from 2013, suggesting that the Chinese Government is trying to keep a steady growth rate in order to keep employment stable. Last, but not least, President Xi is the head of the leading group for the overall reform; showing China's strong determination for reform. |
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Enquiries |
Northern Trust International Fund Administration Services (Guernsey) Limited Harry Rouillard +44 (0) 1481 74 5315 |
Risk Factors
Acquiring shares in BHM may expose an investor to a significant risk of losing all of the amount invested. Any person who is in any doubt about investing in BHM (and therefore the Fund) should consult an authorised person specialising in advising on such investments. Any person subscribing for shares in BHM must be able to bear the risks involved. These include, among others detailed in BHM's Prospectus, the following:
• The Fund is speculative and involves substantial risk.
• The Fund will be leveraged and will engage in speculative investment practices that may increase the risk of investment loss. The Fund may invest in illiquid securities.
• Past results of the Fund's investment managers are not necessarily indicative of future performance of the Fund, and the Fund's performance may be volatile.
• An investor could lose all or a substantial amount of his or her investment.
• The investment managers have total investment and trading authority over the Fund, and the Fund is dependent upon the services of the investment managers.
• Investments in the Fund are subject to restrictions on withdrawal or redemption and should be considered illiquid. There is no secondary market for investors' interests in the Fund and none is expected to develop.
• There are restrictions on transferring interests in the Fund.
• The investment managers' incentive compensation, fees and expenses may offset the Fund's trading and investment profits.
• The Fund is not required to provide periodic pricing or valuation information to investors with respect to individual investments.
• The Fund is not subject to the same regulatory requirements as mutual funds.
• A portion of the trades executed for the Fund may take place on foreign markets.
• The Fund is subject to conflicts of interest.
• The Fund is dependent on the services of certain key personnel, and, were certain or all of them to become unavailable, the Fund may prematurely terminate.
• The Fund's managers will receive performance-based compensation. Such compensation may give such managers an incentive to make riskier investments than they otherwise would.
• The Fund may make investments in securities of issuers in emerging markets. Investment in emerging markets involve particular risks, such as less strict market regulation, increased likelihood of severe inflation, unstable currencies, war, expropriation of property, limitations on foreign investments, increased market volatility, less favourable or unstable tax provisions, illiquid markets and social and political upheaval.
The above summary risk factors do not purport to be a complete description of the relevant risks of an investment in shares in BHM and therefore reference should be had to BHM's Prospectus and related offering documentation for a complete description of these and other relevant risks.
This information is provided by RNS
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