Monthly Shareholder Report - February 2014

RNS Number : 8352C

BH Macro Limited

20 March 2014

 



		BH Macro limited MONTHLY SHAREHOLDER REPORT: February 2014 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.
		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 BMANL20140228

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 $2,204 mm1 1. Estimated as at 28 February 2014 by BHM's administrator, Northern Trust.
Summary Information	BH Macro Limited NAV per Share (estimated as at 28 February 2014) Share Class NAV (USD mm) NAV per Share USD Shares 491.9 $20.08 EUR Shares 177.0 €20.22 GBP Shares 1,535.3 £20.81 BH Macro Limited NAV per Share % Monthly Change USD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.10 0.90 0.15 2.29 2.56 3.11 5.92 0.03 2.96 0.75 20.27 2008 9.89 6.70 -2.79 -2.48 0.77 2.75 1.13 0.75 -3.13 2.76 3.75 -0.68 20.32 2009 5.06 2.78 1.17 0.13 3.14 -0.86 1.36 0.71 1.55 1.07 0.37 0.37 18.04 2010 -0.27 -1.50 0.04 1.45 0.32 1.38 -2.01 1.21 1.50 -0.33 -0.33 -0.49 0.91 2011 0.65 0.53 0.75 0.49 0.55 -0.58 2.19 6.18 0.40 -0.76 1.68 -0.47 12.04 2012 0.90 0.25 -0.40 -0.43 -1.77 -2.23 2.36 1.02 1.99 -0.36 0.92 1.66 3.86 2013 1.01 2.32 0.34 3.45 -0.10 -3.05 -0.83 -1.55 0.03 -0.55 1.35 0.40 2.70 2014 -1.36 -1.16* -2.51* EUR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.05 0.70 0.02 2.26 2.43 3.07 5.65 -0.08 2.85 0.69 18.95 2008 9.92 6.68 -2.62 -2.34 0.86 2.84 1.28 0.98 -3.30 2.79 3.91 -0.45 21.65 2009 5.38 2.67 1.32 0.14 3.12 -0.82 1.33 0.71 1.48 1.05 0.35 0.40 18.36 2010 -0.30 -1.52 0.03 1.48 0.37 1.39 -1.93 1.25 1.38 -0.35 -0.34 -0.46 0.93 2011 0.71 0.57 0.78 0.52 0.65 -0.49 2.31 6.29 0.42 -0.69 1.80 -0.54 12.84 2012 0.91 0.25 -0.39 -0.46 -1.89 -2.20 2.40 0.97 1.94 -0.38 0.90 1.63 3.63 2013 0.97 2.38 0.31 3.34 -0.10 -2.98 -0.82 -1.55 0.01 -0.53 1.34 0.37 2.62 2014 -1.40 -1.12* -2.51* GBP Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.11 0.83 0.17 2.28 2.55 3.26 5.92 0.04 3.08 0.89 20.67 2008 10.18 6.86 -2.61 -2.33 0.95 2.91 1.33 1.21 -2.99 2.84 4.23 -0.67 23.25 2009 5.19 2.86 1.18 0.05 3.03 -0.90 1.36 0.66 1.55 1.02 0.40 0.40 18.00 2010 -0.23 -1.54 0.06 1.45 0.36 1.39 -1.96 1.23 1.42 -0.35 -0.30 -0.45 1.03 2011 0.66 0.52 0.78 0.51 0.59 -0.56 2.22 6.24 0.39 -0.73 1.71 -0.46 12.34 2012 0.90 0.27 -0.37 -0.41 -1.80 -2.19 2.38 1.01 1.95 -0.35 0.94 1.66 3.94 2013 1.03 2.43 0.40 3.42 -0.08 -2.95 -0.80 -1.51 0.06 -0.55 1.36 0.41 3.09 2014 -1.35 -1.17* -2.51* 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 28 February 2014 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
ASC 820 Asset Valuation Categorisation*	Brevan Howard Master Fund Limited Unaudited Estimates as at 28 February 2014 % of Gross Market Value* Level 1 71.7 Level 2 27.9 Level 3 0.4 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.
Performance Review	During the month, the Fund suffered losses mainly in macro equity trading and in FX trading and to lesser extent in EUR interest rate trading. These losses were partially offset by small gains in credit trading and in interest rate trading in currencies other than USD and EUR. Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group Macro Rates FX EMG Equity Commodity Credit Systematic Total February -1.44 -0.01 -0.06 0.10 -0.03 0.03 0.24 0.00 -1.16 QTD -2.59 -0.05 -0.01 -0.13 -0.10 0.04 0.37 -0.03 -2.51 YTD 2014 -2.59 -0.05 -0.01 -0.13 -0.10 0.04 0.37 -0.03 -2.51 Monthly, quarter-to-date and year-to-date figures are estimated by Brevan Howard as at 28 February 2014, 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
Market Review and Outlook	Market Commentary US The temporary disruptions that have slowed economic activity this winter are beginning to abate. Payroll employment rose 175,000 in February, returning to the average monthly gains seen over the prior six and twelve months. Although the unemployment rate ticked up to 6.7%, most of the increase was accounted for by a rise in the participation rate. In addition, initial claims for unemployment insurance have retraced the run-up seen since last November when the bad weather began. The bad weather is not the only reason why growth has disappointed in the current quarter. Coming into this year, manufacturers needed to tap the brakes on the pace of inventory investment, especially in the automobile sector where stocks had ballooned compared with sales. As a result, surveys of purchasing managers suffered and factory output declined. However, new orders rose in the most recent surveys, a development that points to growing production in the coming months. The housing sector has been slow to digest last year's big increases in mortgage rates and house prices. At the same time as affordability has dipped, builders have been disciplined about adding new homes. As a result, housing investment and turnover have slowed noticeably. It is anticipated that this will take a few quarters to work through but will ultimately prove to be a temporary drag as well. The fundamentals in housing are still favourable. Even though affordability has declined, housing is still relatively cheap by historical standards and compared with rents. With household formations running significantly above new production of homes, there's a need for increased housing investment. Looking forward over the next year, housing is expected to be a tailwind for growth albeit a much more modest one compared with the big addition seen earlier in the expansion. Inflation remains stuck in low gear. Headline and core prices rose a little over 1% in the last year. Soft inflation owes mainly to deflation in goods prices, which depends heavily on import prices, which in turn depends heavily on global growth. While global growth disappoints, there's little reason to think there will be significant upward pressure on US inflation any time soon. In terms of monetary policy, the Federal Reserve policymakers have signalled that they are broadly comfortable with their plan for the slow removal of accommodation which was put in place last December. They plan to end asset purchases later this year so long as there is not a significant change in the outlook. As the unemployment rate has fallen quickly, they will have to tweak their forward guidance before long. In particular, the 6.5% threshold for the unemployment rate is nearly obsolete. Although there's some debate, it appears that the Fed will eventually settle on qualitative guidance that de-emphasizes the unemployment rate in favour of a broader dashboard of indicators as a guide to when to expect rate hikes. Economic and Monetary Union ("EMU") In its monthly policy meeting in March, the ECB Governing Council decided to leave the key interest rates unchanged while refraining from adding any other liquidity measure. The ECB also published a new set of macro projections forecasting an inflation rate of well below the ECB definition of price stability throughout the whole forecasting period, encompassing for the first time 2016. The policy decision, together with the tone of a press conference hinting at reluctance by the ECB to stimulate the economy any further despite the disappointing inflation outlook, contributed to spark a renewed appreciation of the Euro, which risks compounding the strong disinflation trend. In the last quarter of 2013, eurozone GDP expanded by a relatively robust 0.3% q/q, ahead of consensus expectations, but in line with our forecasts. The flow of actual indications on economic activity - namely retail sales and industrial production - at the beginning of this year showed a rebound in January following a disappointing December. Car registrations in the first two months of 2014 were instead lower, largely as a payback for the bounce in the last quarter of 2013. Moreover, in February the PMI survey showed an improvement in the business sector, led by services, as the Composite PMI improved further from 52.9 to 53.3 - the highest level since June 2011 - led by stronger business services, while manufacturing softened somewhat. However, the Retail PMI, not included in the Composite PMI, fell back below the 50 threshold from 50.5 to 48.5, indicating a possible renewed setback of retail sales after a strong January. The annual growth rate of eurozone broad money M3 recovered modestly in January from its sharp deceleration in December, when banks sold government bonds and reduced their overnight deposits ahead of the ECB's asset quality review snapshot. Bank lending numbers remained largely unaffected by the snapshot, and the annual growth rate of credit to the private sector remained unchanged in January as well. Overall, the money and credit figures remain weak in all countries and are consistent with further disinflationary pressures down the road. The flash measure of euro area HICP inflation remained unchanged at 0.8% y/y in February, as a noisy jump in French inflation, only partly related to a VAT increase, more than offset the decline in most of other countries. The final February figures as well as the March readings will shed light on whether inflation remains on a downward trend, and whether this trend is consistent, or lower, than the newly published ECB forecasts.   UK The ongoing theme in the UK data is strong growth with weak inflation. Monthly business indicators over the past months have stabilised at high levels or eased back slightly, but have generally remained resilient. Consumer confidence has risen back to pre-crisis levels. Unemployment claims data point to ongoing improvement in the labour market, consistent with above-trend growth. While some moderation in growth is expected in the next few quarters, the data have, if anything, been a little more resilient than had been expected. The composition of growth is also becoming better balanced, which reduces the risk that it will fall back sharply. The initial growth pick-up relied heavily on housing and consumption. Moreover, that consumption acceleration was largely financed with a reduction in savings, as real incomes remained broadly stagnant. But more recent data show improved balanced growth in two respects. First, investment is making an increasing contribution to growth, and with investment intentions at cyclical highs this strength looks set to continue at least in the near term, offsetting the drag from slowing consumption growth. Second, with inflation falling further below target but some increase in wage inflation due to a stronger labour market, real household incomes are set to rise. While consumption growth has slowed from its unsustainable pace in mid-2013, these real income developments are likely to put consumption growth on a sounder footing for 2014. External rebalancing remains a more distant prospect, as this relies on eurozone demand improving by more than currently seems likely. Inflation remains benign and continues to surprise the Bank of England ("BoE") on the downside. Headline inflation has fallen to 1.9%, core is at 1.6% (both at the lowest since 2009). Wage inflation, on the other hand, shows some early signs of improving from its historical lows of around 1%. As the year progresses, wage inflation is expected to normalise further, although since productivity growth is also expected to improve this would not represent a rise in underlying inflationary pressure. The BoE announced in February that there would be no further quantitative guidance once the 7% forward guidance unemployment threshold is reached, likely within the next few months. Instead, the BoE has announced its intention (but not commitment) not to hike in the near term, to hike only gradually once hikes start, and to hike to a level well below historical estimates of the neutral rate. The main reason why quantitative guidance has been dropped is that the BoE faces significant uncertainties over the required path of interest rates, linked closely to the uncertainty about productivity. If productivity growth does not pick-up, wages cannot sustainably pick-up either. The recovery would likely fizzle out. If productivity growth does pick-up (still the BoE's forecast) growth will become more sustainable. But such productivity-led growth would also generate very little inflation pressure. The case for rate hikes would mostly rest on a desire to move away from emergency policy settings, rather than a need to curtail immediate inflation pressures. Japan Real GDP rose 0.7% in the fourth quarter of 2013, disappointing the market consensus.  However domestic demand was solid with PCE posting a decent rate of increase and business investment rising rapidly.  Soft export demand and a sharp run up in imports held down the top line.  There is some thought that importers moved goods to be set up for a first quarter surge in demand as purchasers front run the consumption tax increase.  However, imports rose at a robust rate earlier in 2013, and it is clear that there have been some structural changes in the balance of domestic and foreign production.  Increased petroleum and LPG demand due to the nuclear-plant shutdowns explains only a fraction of the deterioration in the trade balance.  At a higher frequency, industrial production rose in January with significant increases across a range of industries. Recent survey data are mixed.  The Shoko-Chukin survey of small and medium enterprises moved up in February to its highest level since 1990.  In contrast, the Composite PMI as well as consumer confidence declined.  Views on employment have held up, but income and livelihood measures have weakened since spring 2013, perhaps reflecting angst over the balance between prospective wage increases and inflation, including the upcoming consumption tax hike.  The Economy Watchers survey diverged with the current conditions index holding up but the future conditions index softening. The latest consumer price data were disappointing.  Western core prices declined -0.1% on a seasonally-adjusted basis in January across the country and were flat in February in Tokyo.  Base effects may support gains in the year-on-year increase over the next couple months, but progress is expected to plateau without a further acceleration in the underlying trend.  In that regard, the authorities are hopeful that, as the momentum from energy-cost increases and the sharp depreciation in the yen falls, an increase in inflation expectations as well as wage and margin increases from tightening labour markets and a narrowing output gap are able to take up the baton.  However timing is particularly tricky. Some important information on wages will be available in mid-March when large companies are expected to announce their reactions to union wage demands.  The authorities are banking on some increase in base wages (as opposed to bonus payments).  Such an increase would be the first in a long time and would go a long way to establishing a higher rate of inflation expectations and national confidence in Abenomics more generally.  Increases among large corporations would also put pressure on small and medium-sized corporations.  Not to be ignored is the 8% wage increases scheduled for Government workers, as the wage cut they took a few years ago to help pay for earthquake reconstruction is unwound. China In February, the key themes were the Renminbi ("RMB") depreciation late in the month and the continuation of a cyclical slowdown. The market has now reached consensus that the currency depreciation was a deliberate policy move, with a twofold motivation:  the People's Bank of China ("PBoC") intention (i) to show that the RMB can move in both directions and thus reduce speculative positioning; and (ii) to close the gap between spot and fixing rates while preparing to widen the RMB fluctuation band. The latest currency movement followed a 3% appreciation in 2013, which attracted capital inflows betting on a RMB appreciation. As a consequence of the PBoC's intervention, the one week SHIBOR rate collapsed from mid-4% to 1.7% and was still low at 2.1% as at 3 March. The policymakers' focus is still most likely on the onshore CNY market, rather than on CNH structured products. The impact of this depreciation on the behaviour of the onshore corporate sector is not known yet, while the media says that the SAFE has required banks to estimate this impact. Recently published statistics in January and February on activity in China have been disappointing. Business surveys - namely the HSBC and the official PMI - indicated a further slowdown from the cyclical peak recorded in the third quarter of 2013. In particular, the HSBC Composite PMI, encompassing both manufacturing and services, fell back below the 50 threshold, from 50.8 to 49.8. Industrial production, fixed asset investments and retail sales have all showed a meaningful slowdown, largely undershooting market expectations. After a largely seasonal rebound in January, both money and credit aggregates showed a continuation of a moderate deceleration trend on a 3m/3m seasonally-adjusted metric in February.
Enquiries	Northern Trust International Fund Administration Services (Guernsey) Limited Harry Rouillard [phone]

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.

 

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