Key Takeaways
- • Brevan Howard Master Fund posted its worst annual performance since inception in 2003, finishing 2010 up less than 1% through December 23, with losses in three consecutive final months.
- • The $19 billion flagship macro fund, representing the bulk of the firm's $27 billion in assets under management, suffered material losses in interest rate directional and curve trading strategies.
- • Partial offsets to rate trading losses came from gains in LIBOR basis swaps, swap spreads, interest rate volatility, credit, and commodity strategies, demonstrating mixed performance across portfolio components.
- • Brevan Howard ranked as the UK's largest hedge fund firm and fourth largest globally at the time, making the performance decline particularly significant for the institutional investor base.
- • Alan Howard, who built the firm after spending 20 years at Credit Suisse leading interest-rate derivatives trading, saw the fund struggle after Credit Suisse attempted to reduce his compensation in 2002, prompting the spin-out.
Summary
Alan Howard's Brevan Howard Master Fund delivered its worst performance since launching in 2003, finishing 2010 with a gain of less than 1% through December 23. The roughly $19 billion flagship macro hedge fund, which comprised the bulk of the firm's $27 billion in total assets under management, struggled throughout the year and posted losses in each of the final three months.
The underperformance was driven primarily by losses in interest rate trading strategies, with particular weakness in directional and curve trading. According to the shareholder report for BH Macro Ltd., a feeder fund investing in the Master Fund, these interest rate losses were partially offset by gains in LIBOR basis swaps, swap spreads, and interest rate volatility trading. The fund also generated positive returns from credit and commodity strategies during the year.
The fund's monthly performance data reveals inconsistency throughout 2010. In September, Brevan Howard recorded gains across interest rates, volatility, swap spreads, curve trading, directional strategies, and foreign exchange, with smaller profits in equity, commodity, and credit. By October, however, the fund suffered renewed losses in curve and directional interest rate strategies, though these were partially offset by gains in swap spreads and volatility. This volatility continued into the final quarter, producing net losses.
The weakness represented a significant inflection point for Howard's operation, which had ranked as Europe's dominant hedge fund manager at the time. Howard's 20-year tenure at Credit Suisse, where he headed interest-rate derivatives trading, established his expertise in the macro and rates strategies that formed the core of the Master Fund's mandate. Brevan Howard was spun out from Credit Suisse in 2002 after then-chairman and CEO John Mack attempted to reduce Howard's compensation.
The underperformance was driven primarily by losses in interest rate trading strategies, with particular weakness in directional and curve trading. According to the shareholder report for BH Macro Ltd., a feeder fund investing in the Master Fund, these interest rate losses were partially offset by gains in LIBOR basis swaps, swap spreads, and interest rate volatility trading. The fund also generated positive returns from credit and commodity strategies during the year.
The fund's monthly performance data reveals inconsistency throughout 2010. In September, Brevan Howard recorded gains across interest rates, volatility, swap spreads, curve trading, directional strategies, and foreign exchange, with smaller profits in equity, commodity, and credit. By October, however, the fund suffered renewed losses in curve and directional interest rate strategies, though these were partially offset by gains in swap spreads and volatility. This volatility continued into the final quarter, producing net losses.
The weakness represented a significant inflection point for Howard's operation, which had ranked as Europe's dominant hedge fund manager at the time. Howard's 20-year tenure at Credit Suisse, where he headed interest-rate derivatives trading, established his expertise in the macro and rates strategies that formed the core of the Master Fund's mandate. Brevan Howard was spun out from Credit Suisse in 2002 after then-chairman and CEO John Mack attempted to reduce Howard's compensation.
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