Monthly Shareholder Report - September 2014

RNS Number : 8118U

BH Macro Limited

20 October 2014

 



		BH MACRO LIMITED MONTHLY SHAREHOLDER REPORT: SEPTEMBER 2014 YOUR ATTENTION IS DRAWN TO THE DISCLAIMER AT THE END OF THIS DOCUMENT

BH Macro Limited	Overview
Manager: Brevan Howard Capital Management LP ("BHCM") Administrator: Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust") Corporate Broker: J.P. Morgan Cazenove Listings: London Stock Exchange (Premium Listing) NASDAQ Dubai - USD Class (Secondary listing) Bermuda Stock Exchange (Secondary listing)	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: $1,922 mm¹
	1. Estimated as at 30 September 2014 by BHM's administrator, Northern Trust.
Summary Information	BH Macro Limited NAV per Share (estimated as at 30 September 2014)
	Share Class NAV (USD mm) NAV per Share USD Shares 410.0 $20.78 EUR Shares 141.3 €20.91 GBP Shares 1,370.6 £21.56
	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 -1.10 -0.40 -0.81 -0.08 -0.06 0.85 0.01 3.93* 0.88*
	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 -1.06 -0.44 -0.75 -0.16 -0.09 0.74 0.18 3.85* 0.79*
	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 -1.10 -0.34 -0.91 -0.18 -0.09 0.82 0.04 4.26* 1.03*
	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 BHCM.  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 30 September 2014 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
ASC 820 Asset Valuation Categorisation*	Brevan Howard Master Fund Limited
	Unaudited estimates as at 30 September 2014
	% of Gross Market Value* Level 1 62.8 Level 2 36.9 Level 3 0.3
	Source: BHCM * These estimates are unaudited and have been calculated by BHCM 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	The information in this section has been provided to BHM by BHCM
	During the month, the Fund profited in FX trading, mainly being long USD versus a basket of currencies. Smaller gains were also made in EUR and USD interest rate trading and in equity trading.
	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 Discount Management Total Sep 3.06 0.51 0.18 0.11 0.11 -0.10 0.03 0.00 0.04 3.93 Q1 2014 -3.23 -0.08 -0.03 -0.01 -0.06 0.02 0.55 -0.05 0.07 -2.83 Q2 2014 -1.84 0.13 -0.04 0.02 -0.09 0.02 0.20 -0.00 0.66 -0.95 Q3 2014 3.08 0.63 0.25 0.26 0.21 -0.14 0.11 0.01 0.36 4.82 YTD 2014 -2.08 0.68 0.18 0.27 0.06 -0.10 0.86 -0.04 1.08 0.88
	Monthly, quarter-to-date and year-to-date figures are estimated by BHCM as at 30 September 2014, based on total performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited. Figures rounded to two decimal places. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
	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
Manager's Market Review and Outlook	The information in this section has been provided to BHM by BHCM
	Market Commentary US Growth appears to be running at an annualised rate of approximately 4% through the middle two quarters of the year. Part of that strength represents a rebound from the pothole in the first quarter, so a more sustainable pace looks to be around 3% over the coming year. Compared with fundamentals, consumption is a little more tepid than expected, although auto sales are robust. By contrast, business investment is a little firmer than anticipated. Housing is mixed - construction and sales are slowly trending up, but house prices have flattened out. The biggest downside risk to the expansion is the external sector, where the news has been almost uniformly bad. The labour market got back on track in September. Payrolls rose at a brisk pace and prior month's moderate gains were revised up noticeably. The unemployment rate dropped below the psychologically important 6% threshold to 5.9%. Over the last year, the unemployment rate has declined a significant 1.3 percentage points which is a faster rate of decline than seen in either of the prior two business cycles dating back 25 years. Broader measures of labour market underutilisation have fallen even faster, although such levels are still high by historical standards. The bottom line is that the economy is getting closer to full employment, but still has significant slack because the recession was so deep. Market developments point to risks from the external sector and weak inflation. The exchange value of the US dollar appreciated significantly last month, oil and other commodity prices plummeted, and market-based measures of inflation compensations moved down into the low end of the range seen in the last decade. These trends suggest the global economy faces significant disinflationary forces which may have an impact on domestic US inflation, which is already below 2%. These trends merit close attention going forward as they may be an unexpected vulnerability. In the inter-meeting period, US Federal Reserve officials reinforced the wait-and-see message from the last meeting. The next two meetings are expected to be more interesting as the economy's strength forces them to communicate their plan for policy normalisation. EMU Reflecting the ongoing loss of momentum in the euro area economy, German industrial production fell in August by a large -4.0% m/m on the back of a downward revised increase in July. Although the large monthly fluctuations can be largely attributed to calendar effects and production can be expected to rebound again meaningfully in September, the underlying trend in the German industrial production is turning negative, consistent with the weak business sentiment indicators. Amongst factors affecting sentiment and orders is the deterioration of demand in main destination markets for German products, from Italy, to France, China and Eastern Europe. Indeed, the crisis in Russia/Ukraine is affecting Germany proportionally harder than the other major economies in EMU. At the EMU level, both the manufacturing and the services PMIs were revised down in their final release, leaving the EMU Composite PMI at 52.0 in September, down -0.5pt from August. Also, the EMU retail PMI, from 49.4 to a low 47.1, signalling that domestic demand is weakening too. On the inflation front, EMU HICP inflation fell from 0.4% y/y to the cyclical low of 0.3% y/y, with core inflation dropping from 0.9% y/y to 0.7% y/y. Meanwhile, inflation expectations continued to slip in the medium-term horizon, putting pressure on the ECB to keep its activist policy stance going. The 10yr breakeven inflation has declined to 1.46% and 5yr breakeven inflation to 1.03%, while 5yr5yr forward breakeven inflation has moved down to 1.89%. Both the 10yr spot and 5yr5yr forward breakeven inflation rates are now at their all-time lows. Deterioration in inflation expectations is also evident in survey data: according to the European Commission's Economic Sentiment Indicator, consumers sharply lowered their expectations of inflation 12 months ahead, while reporting that they had experienced lower inflation over the last 12 months. Similarly, companies lowered their selling price expectations in the manufacturing and retail sectors. The annual growth rate of broad money supply M3 has continued to recover. An improvement in the monthly money and credit flows earlier in the year is now translating into higher y/y numbers. However, net lending to households and non-financial corporations has remained broadly unchanged. The underlying trend therefore remains weak, although continues to improve slowly. As a result, the credit impulse is in positive territory. The ECB's October policy meeting kept the language of the introductory statement virtually unchanged from the previous statement. As had been announced, the ECB communicated the broad outlines of its ABS and covered bond purchase programmes. The modalities were even more generous than had been anticipated, allowing, for example, the ECB to purchase up to 70% of individual securities issuances as opposed to maximum 30% in the old covered bond purchase programmes. The rating criteria were also adjusted to allow for purchases of assets from Greece and Cyprus. President Draghi stressed that the potential universe for the ABS and covered bond purchases programme was up to €1 trillion over the two years' horizon that the programme is expected to last, adding that on top of this would come the impact of the TLTROs. Draghi repeated that the ECB stood ready to take further measures if needed. This could become topical if the ECB concluded that either the measures taken are insufficient to achieve the desired balance sheet expansion or if a weaker macroeconomic and price environment suggests that the amounts needed exceed €1 trillion. UK Over the past month there has been further evidence of a slowing in UK growth momentum, especially in the housing market which is likely to have knock-on effects on growth in the coming quarters. Manufacturing seems to have stalled, while services and construction continue to hold up. The 10% FX appreciation over the past year and a half, as well as the renewed slowing in Eurozone growth seem to be taking a toll. Housing market activity has been slowing for several months, and with the usual lag, there is now also a reduction in price dynamics. Average prices for the whole country are approximately stagnating now, after a period of 10% annualised growth. Prices in London are already falling. The main cause of the housing market slowdown seems to be the macro-prudential tightening by the Bank of England earlier in the year. This has had a larger effect than intended, as banks seem to have tightened conditions to remain well inside the BoE's guidance. Fear of future property tax changes are also acting as a drag on the housing market. The labour market continues to show a puzzling mix of very rapid declines in the unemployment rate, but also very weak wage growth. The unemployment rate is likely to fall below 6% in the coming months, once again falling even faster than the BoE's forecast. But against that, wage growth remains very weak, and shows little sign of picking up, therefore disappointing the BoE's forecast. Moreover, there are some early signs that employment growth is starting to slow, a development that is expected to continue in response to an overall slowdown in economic growth. A backdrop of slowing growth and rapidly falling unemployment but weak wage growth does not require urgent rate hikes. While the BoE seemed to have contemplated the possibility of a November hike at some point in early summer, the policy debate has evolved towards hiking in February or later, rather than earlier. Much will depend on the evolution of overall growth and wage inflation in the coming months. A sufficient disappointment on this front could still push the first rate hike beyond the May election. Even if the first hike does take place in February, the subsequent hiking pace is likely to be very slow.  Japan As was widely expected, the Bank of Japan (BoJ) wrapped up its October monetary policy meeting leaving policy unchanged.  Importantly, Governor Kuroda repeated his argument that the core CPI will reaccelerate towards 2% in the second half of the year and that the BoJ's intention to achieve the 2% price stability target in about two years has not changed.  The latter affirmation is in response to a public discussion, including other members of the Board of the BoJ, that the BoJ should relax the timeframe to reach the target. Governor Kuroda is in a tough position.  On the one hand, the BoJ likely overrates its ability to control inflation dynamics. The BoJ's forecast is that as the effects of the prior yen depreciation wears off, typical Phillips-curve effects would take up the baton of re-inflation. That recipe always came with one part hope as Phillips curves everywhere are practically flat; it's more difficult now given the obvious hit to the economy from the consumption tax hike.  Indeed, the BoJ took note of the recent slowdown in industrial production. In addition, energy prices were a tailwind to re-inflation; they are now a headwind given falling oil prices. Finally, while the recent yen depreciation is expected to help to a degree, the volume of politically-inspired complaints over yen weakness has turned up. On the other hand, it is likely to be the case that the original promise to reach 2% inflation in about two years' time has been an important impetus in pushing inflation up.  Consumer inflation expectations have risen, even though that improvement has stalled in the last half year.  The pass-through of the previous yen drop into domestic prices also seemed stronger than over previous episodes.  A relaxation in the BoJ's timeframe runs the risk of undoing some of the change in expectations that it has accomplished to date. At the same time, commitment towards structural reform has weakened. While Prime Minister Abe reiterated his support for the Trans-Pacific Partnership in a speech to the National Diet, there is no evidence that he is willing and able to push through the necessary revisions to agricultural tariffs that appear necessary to reach a deal.  Meanwhile, recent press reports indicate that the Government is anticipated to delay its decision to shift the Government Pension Investment Fund's portfolio allocations. Recent readings from surveys of consumer and businesses were uninspiring.  The best was the Shoko-Chukin survey of small businesses that improved in August. The Q3 Tankan survey results remained above the waterline but slipped somewhat from the second quarter.  The economy watchers survey moved down. Consumer confidence is mired at a level closer to the 2012 average than the optimism seen after Abenomics was introduced. Meanwhile, the latest inflation data disappointed with core inflation declining 0.2% on a seasonally adjusted basis from July to August and western core prices edging down 0.1%. China Data has shown a mixed pattern in August and September. In September both the official and the HSBC manufacturing PMI recorded similar readings to August, remaining - though barely - in expansionary territory. In contrast, actual data weakened meaningfully in August, with industrial production slowing from 9% y/y to 6.9% y/y. Credit growth is moderating too. Although total social financing formation recovered in August to RMB957.4bn from the low level of RMB271bn in June, it was still below the consensus (RMB1.1tn). In year-to-date terms, total social financing continues to lag behind the 2013 level by 6.3%. On the external side, China recorded another large trade surplus of US$49.8bn in August, compared with the prior figure of US$47.3bn and a consensus of US$40bn. Exports grew by 9.4% y/y, compared with the prior figure of 14.5% y/y and market expectations of 9%; imports contracted by 2.4% y/y, below market expectations. The data breakdown suggests that weaker imports were driven by both soft commodity prices and sluggish domestic demand. The average monthly trade surplus up to August is US$25bn, which now sits at the high band of previous estimates of US$20-25bn per month for 2014; seasonality will play a favourable role on the trade balance for the remainder of the year. Policy makers have not signalled any meaningful future policy changes, except some mild easing signals by the PBoC which include: (i) a lower 14-day repo rate, down from 3.7% to 3.5%; (ii) financing of RMB500bn to the largest five banks (reported by the media and unverified by the PBoC); and (iii) easing mortgage policy on first home purchases, by classifying a second home as a first one if the first house's mortgage is fully paid. However these measures may have limited impact on the real economy.
Enquiries	Northern Trust International Fund Administration Services (Guernsey) Limited Harry Rouillard [phone]

Important Legal Information and Disclaimer

BH Macro Limited ("BHM") is a feeder fund investing in Brevan Howard Master Fund Limited (the "Fund").  Brevan Howard Capital Management LP ("BHCM") has supplied certain information herein regarding BHM's and the Fund's performance and outlook.

The material relating to BHM and the Fund included in this report is provided for information purposes only, does not constitute an invitation or offer to subscribe for or purchase shares in BHM or the Fund and is not intended to constitute "marketing" of either BHM or the Fund as such term is understood for the purposes of the Alternative Investment Fund Managers Directive as it has been implemented in states of the European Economic Area. 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 to be reliable, but none of BHM, the Fund or BHCM make any 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 BHCM expressly disclaim any obligations to update or revise such estimates to reflect any change in expectations, new information, subsequent events or otherwise.

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.  All investments are subject to risk. You are advised to seek expert legal, financial, tax and other professional advice before making any investment decisions.

THE VALUE OF INVESTMENTS CAN GO DOWN AS WELL AS UP.  YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED AND YOU MAY LOSE ALL OF YOUR INVESTMENT.  PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS.

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 gaining exposure to the Fund) should consult an authorised person specialising in advising on such investments. Any person acquiring shares in BHM must be able to bear the risks involved. These include 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 Fund's 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.

• 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 and its investment managers are 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 of BHM or the Fund and therefore reference should be made to publicly available documents and information.

 

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