Brevan Howard leads the listed hedge fund market to the cusp of fundamental change

Brevan Howard’s Master hedge fund requires direct investors to invest a staggering $20m to get in. However, investors can gain access to such a high-end offering via the group’s BH Global vehicle, for £11.29

Brevan Howard seems, at first blush, to be one of the world’s least accessible hedge funds.
Its co-founder Alan Howard is rarely heard and never seen. His firm, Europe’s largest hedge fund politely declines to comment when mentioned in the press. And its flagship $20bn Master fund requires direct investors to stump up at least $20m to get in.

So retail investors need not apply? Not quite.

Since last May, they could buy shares in the listed BH Global. It allocates its $990m among six of Brevan’s hedge funds, including the Master, which made about 21% in the mercurial markets of 2008.

Lord Andrew Turnbull, BH Global’s chairman, says wealthy individuals and their advisers, private banks and family offices currently rub shoulders with some institutional investors as the main shareholders – but IFAs and their clients are welcome, too.

He says: “The [Master] hedge fund itself may benefit from having a listed feeder vehicle. Having BH Global allows Brevan Howard to access a wider range of investors who may not have more than $1m or $5m to invest in the strategy.”

The growing trend of hedge funds becoming more accessible to all was reflected last month by rival Marshall Wace announcing it was launching an exchange-traded fund that will track the performance of at least six variants of its flagship Tops hedge fund strategy.

Cusp of change

Demand for BH Global shares – now £11.29 each – boosted their price by 38% last year. They now trade at a narrow 5% discount to NAV. Brevan Howard’s other listed vehicle, BH Macro, trades at a slight premium – a rarity in the sector which was widely sold off during the crisis.

Mark James, executive director on the investment funds team at Royal Bank of Scotland, says demand for Brevan’s funds, and similar demand for an equivalent product that invests only in funds of $17bn rival Bluecrest Capital Management, have put the listed hedge fund industry on the cusp of fundamental change.

For the first time, broadly diversified funds of hedge funds could be overtaken in aggregate size by single manager hedge funds.

The diversified vehicles, such as those from HSBC and Dexion Capital, which kick-started the industry, are now valued at £3.6bn. Single manager funds, which have emerged more recently, are now valued at £3.2bn, but this is rising.

James says: “Shares in a number of single manager funds are trading back at NAV or at a small premium to NAV. If you had asked people six or 12 months ago if they thought that would be the case, there would have been nervous laughter.”

By contrast, he says, “We are still seeing cash being returned to investors by funds of funds, and we have a whole host of continuation votes coming up in the next two months.”

James says the tipping point in favour of single manager products could come when Brevan caps its Master fund to new money. This will leave BH Global and BH Macro as the only widely available routes into it, and it is widely expected to boost the demand for, and size of, the two listed vehicles.

In opting for single manager funds, it could be argued, shareholders are ignoring any benefit to be had by diversifying their money between different managers.

One London-based fund of funds manager says, “There is a lot of manager risk you run in picking just one management house, or just one manager.

“But if you get the right one, it can pay off in a big way. Investments in hedge funds add skepticism to a traditional portfolio, and 2008 showed having a dose of cynicism that markets only go up was important to have. It is equally important when markets are rising as it is to have when they fall. But you need to have a skeptic who is also skilful, like Alan Howard.”

Riding the credit crunch

Performance of BH Global during the height of the credit crunch suggests scepticism paid off for investors in Brevan’s funds.

In the six months to March last year – the sharp end of the crisis – BH Global’s NAV fell
in only one month, by 3.9% in September.

Hedge funds overall fell by 15% and shares slumped by 40%.

Simon Elliott, head of listed fund research at Winterflood Securities, says: “Closed-ended hedge funds were in terrible shape going into 2009. The speed and savagery of the derating of the sector in the second half of 2008 had been dramatic.

“From trading on a premium over the summer of 2008, the sector’s discount widened out and was briefly around 30% at the end of the year…triggered by poor NAV performance, and growing fears over the underlying exposure.”

Since then, the industry has returned about £1.7bn to shareholders, in bids to narrow discounts, and efforts to allow those who wanted cash back, to get it.

It returned £320m by buying back shares and £1.4bn through tender offers. At least a further £130m is being returned by funds of hedge funds over the coming two years. At least two funds of funds have voted to wind themselves down.

Admittedly, it has not been all plain sailing for Brevan Howard, either.

Its Global fund faced, and passed by more than 95%, a shareholder vote on its future in October. Both Macro and Global have had to soak up their shares in a bid to narrow their respective discounts to NAV.

RBS’s James says: “Across the fund of funds sector, we saw recovery last year. But some investors are taking a two year perspective on performance. Cash is still being returned to investors and we  have a whole host of continuation votes coming up over the next two months.”

By contrast, he adds, Bluecrest’s AllBlue was able to raise £101m through a share issue in December. Turnbull says raising further capital is a logical future step for BH Global – though he is quick to add there is no pressure from Brevan Howard for it to do so quickly.

James does not hold out high hopes all the broadly diversified funds of hedge funds will survive the aftermath of the credit crisis, whose damage is still fresh in investors’ minds. He adds the most seasoned funds of funds probably will continue, but the sector will be depleted.

Dexion Absolute faces a second vote on its future, which it has convened in February. It
was triggered automatically by poor share price performance in early 2009. At least two others do, too.

Last year, funds of funds such as Acencia and Dexion Absolute beat Brevan Howard’s funds, James says, however multi-manager funds are still out of favour.

Turnbull says listed hedge funds generally may be favoured by allocators seeking access to hedge fund investment skills because they offer favourable liquidity, which hedge funds lack.
This is because the shares investors buy in listed hedge funds can, like any other tradable equity, be offloaded in three days.

Direct investors in unlisted hedge funds face waiting for at least 145 days to redeem from many hedge funds.

Furthermore, about one third of hedge funds curbed withdrawals at the height of the credit crisis, and some investors in these have been told they will have to wait for years to retrieve their money.

Turnbull says: “There are a lot of private investors or trusts who feel uncomfortable with the long notice periods and monthly dealing dates, which apply to hedge funds, and with the risk of redemptions being ‘gated’. These restrictions do not apply to investments in a quoted company.”

He says BH Global’s allocation between Brevan’s underlying funds has remained fairly stable since launch, and he does not predict large changes.

It currently has 42% of assets in the Master fund, 20% in Brevan’s Emerging Markets Strategies fund, 18% in its Asia fund and the rest in its Strategic Opportunities and Credit Catalyst funds, and cash.