Key Takeaways
- • BH Macro Limited delivered 9.13% year-to-date performance as of June 2018, outperforming the flat FTSE 100 Index, with an 8% gain in May alone driven by a spike in market volatility related to Italian political concerns.
- • BH Macro trades at an 8-9% discount to net asset value, signaling potential valuation opportunity for investors seeking portfolio insurance characteristics during market downturns.
- • Brevan Howard positions its macro fund as portfolio insurance rather than a traditional alpha generator, with chairman Huw Evans arguing that shareholders should view the investment as protection against market declines, accepting lower returns during periods of sustained calm.
- • Recent market volatility has validated the hedge fund insurance thesis, demonstrating that macro strategies designed to profit during difficult market conditions can deliver meaningful outperformance when equity markets face stress.
Summary
Brevan Howard's BH Macro Limited fund is experiencing a resurgence in relevance as investors reassess the role of alternative strategies in portfolio construction. The London-listed fund, which provides exposure to Brevan Howard's flagship Master Fund, generated 9.13% year-to-date returns through June 2018—outpacing the UK equity benchmark despite the FTSE 100 Index remaining essentially flat since January. This outperformance stands in sharp contrast to Brevan Howard's challenging recent history, when prolonged periods of low volatility and stable equity markets offered limited opportunities for macro-oriented strategies.
The fund's May performance exemplified this dynamic, with a spike in volatility driven by uncertainty surrounding Italian politics generating an 8% monthly gain. According to Huw Evans, chairman of BH Macro, this result underscores a fundamental strategic positioning: the fund should be evaluated as portfolio insurance rather than as a standalone wealth-generating vehicle. "They [shareholders] regard an investment in BH Macro as an insurance policy in the event that markets go down. Wealth managers, in particular, realise there will be rainy days at some point," Evans said.
The fund's 8-9% discount to net asset value adds another dimension for value-oriented allocators. Brevan Howard's thesis rests on the proposition that extended bull markets eventually conclude and that asset allocators require protection mechanisms precisely when complacency is highest. This positioning acknowledges the cost-benefit tradeoff explicitly: investors will underperform during extended periods of stability to secure downside protection during market dislocations. For institutional and family office investors with multi-year time horizons and meaningful equity exposure, this insurance characteristic may represent a rational portfolio construction decision, particularly given the apparent consensus that near-term market conditions remain uncertain.
The fund's May performance exemplified this dynamic, with a spike in volatility driven by uncertainty surrounding Italian politics generating an 8% monthly gain. According to Huw Evans, chairman of BH Macro, this result underscores a fundamental strategic positioning: the fund should be evaluated as portfolio insurance rather than as a standalone wealth-generating vehicle. "They [shareholders] regard an investment in BH Macro as an insurance policy in the event that markets go down. Wealth managers, in particular, realise there will be rainy days at some point," Evans said.
The fund's 8-9% discount to net asset value adds another dimension for value-oriented allocators. Brevan Howard's thesis rests on the proposition that extended bull markets eventually conclude and that asset allocators require protection mechanisms precisely when complacency is highest. This positioning acknowledges the cost-benefit tradeoff explicitly: investors will underperform during extended periods of stability to secure downside protection during market dislocations. For institutional and family office investors with multi-year time horizons and meaningful equity exposure, this insurance characteristic may represent a rational portfolio construction decision, particularly given the apparent consensus that near-term market conditions remain uncertain.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.