Saturday, 9 October 2010

Brevan Howard Adds Strategies to Increase Capacity

When you are Europe's largest hedge fund manager and run one of the world's largest hedge funds you are bound to run into constraints on the amount of capital you can run successfully. Brevan Howard Capital Management Limited has around $32 billion under management, and three-quarters of that is in the Brevan Howard Master Fund Ltd., a global macro and relative value fund focused on fixed-income and currency markets. 

The only respect in which the BH Master Fund is concentrated is in the number of  major decision makers running it. Alan Howard has the largest risk budget at the firm, and there are a small number of other senior risk takers - the trusted lieutenants of  Howard who have worked with him and for him since the launch of the firm. This small cadre take most of the risk in the Fund. There have been few changes in the risk-taking leadership of the firm in either personnel or number. Alan Howard has to trust this macro and fixed income elite squad, and this trust is not earned quickly. 

A consequence is that unless the style of investment changes, and/or the level of risk assumption across the team changes it is difficult for the Master Fund to take in new capital. Alan Howard has been explicit about this - he has had no intention of changing the scope or style of the Master Fund - so when he opened the Fund to new subscriptions last year it was for a short period and was soon over-subscribed. 

For the firm to grow, Brevan Howard has to add new strategies either in the existing fund(s) or add new funds dedicated to new strategies. The Baker Street based macro mavens have decided to follow the latter route it was announced this week with this press release:

"David Gorton and Brevan Howard are pleased to announce the formation of a new joint venture, DG    Systematic Trading LLP, to pursue systematic trading strategies.  David Gorton is the Chief Investment Officer of the new venture with responsibility for the management and development of trading strategies based upon a suite of systematic models which have been running capital since May 2006 including capital allocated from Brevan Howard Master Fund since 1 March 2010.   

 DG Systematic Trading LLP will be FSA authorised and will act as investment manager of Brevan Howard Systematic Trading Fund, a systematic trading fund which utilises Brevan Howard's risk management and execution platform. Brevan Howard Systematic Trading Fund has been seeded with $300 million from Brevan Howard Master Fund and has been successfully traded by David Gorton and his team since 1 March 2010.  For the period from 1 March to 30 September this strategy has delivered returns on allocated capital of 9.3% net of fees." 

For those who can't quite place the name, Gorton is the former JP Morgan trader who was co-founder and is still co-Chief Executive of London Diversified Fund Management. London Diversified Fund Management ran the London Diversified Fund and the London Select Fund, using a style similar to that of former hedge fund giant Vega Asset Management in fixed income/macro. The eventual commercial outcomes of the LDFM funds were also similar to those of Vega.  At the start of 2008 LDFM managed $5bn and today is thought to run somewhere North of $500m. It may be indicative that around $200m of those funds are in a managed account.

The Brevan Howard press release emphasises that the investment strategy to be utilised in the new fund are based on a "strictly quantitative approach". It is also important from the BH perspective that the new Fund utilises the Brevan Howard risk management and execution platform. Each trade and the overall risk profile of the portfolios can be monitored real-time by the BH risk professionals and compliance with the mandate can be verified readily. It is an interesting commercial arrangement in that a joint venture has been formed, and that David Gorton remains running an independent asset management entity, even if he has had to be additionally registered for FSA purposes at Brevan Howard.

Additional: This week Brevan Howard announced that they are set to float a new investment company – BH Credit Catalysts limited - on the London Stock Exchange in December. As the name suggests the Fund trades in the credit markets, and in this particular case with a bottom-up catalyst-driven credit trading style. The underlying Fund is advised by DW Investment Management, headed by David Warren, and has been running for over two years. The DWIM Team consists of 22 professionals based in New York.

David Warren joined Brevan Howard in January 2008 with a mandate to build a credit team. The team spun out from Brevan Howard in June 2009 and continues to use Brevan Howard’s infrastructure and risk management. DWIM’s credit team has a strong track record producing total return performance of +44% in the period from May 2008 to August 2010, a period characterised by some of the most volatile markets in recent history (2008-2010). Over this period the existing credit fund has been the best performing fund at Brevan Howard.

The Listing of the investment company does not necessarily increase capacity for new capital at Brevan Howard, but does allow for the creation of permanent capital for the money management firm, as this is a closed ended vehicle. What Alan Howard did not do is allow more capital into the BH Master Fund and then allocate from that to the Credit Catalyst Fund. This is an externally visible signal that confirms the confidence that Howard has in DWIM.

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