Monthly Shareholder Report
BH MACRO LIMITED
MONTHLY SHAREHOLDER REPORT
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Important Legal Information and Disclaimer BH Macro Limited (the "Fund"), is a feeder fund investing in the Brevan Howard Master Fund Limited ("BHMF"). Brevan Howard Asset Management LLP ("BHAM") has supplied the following information regarding BHMF's September 2009 performance and outlook. BHAM is authorised and regulated by the Financial Services Authority. This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the "Act") and the handbook of rules and guidance issued from time to time by the FSA (the "FSA Rules"). The material relating to the Fund and BHMF included in this report has been prepared by BHAM and is provided for information purposes only and does not constitute an invitation or offer to subscribe for or purchase shares in the Fund. 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 the Fund and BHMF have been obtained or derived from sources believed by BHAM to be reliable, but BHAM makes no representation as to their accuracy or completeness. Estimated results, performance or achievements may materially differ from any actual results, performance or achievements. Except as required by applicable law, the Fund and BHAM expressly disclaim any obligations to update or revise such estimates to reflect any change in expectations, new information, subsequent events or otherwise. All investments are subject to risk. Prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decisions. Tax treatment depends on the individual circumstances of each investor in the Fund and may be subject to change in future. Returns may increase or decrease as a result of currency fluctuations. You should note that, if you invest in the Fund, 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. Potential investors in the Fund should seek their own independent financial advice. BHAM neither provides investment advice to, nor receives and transmits orders from, investors in the Fund nor does it carry on any other activities with or for such investors that constitute "MiFID or equivalent third country business" for the purposes of the FSA Rules. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS |
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Summary information |
BH Macro Limited NAVs per share (as at 30 September 2009)
Source: Underlying BHMF NAV data is provided by the Administrator of BHMF, International Fund Services (Ireland) Limited. BH Macro Limited NAV and NAV per Share data is provided by the Fund's Administrator, Northern Trust International Fund Administration Services (Guernsey) Limited. BH Macro Limited NAV per Share % Monthly Change calculations made by BHAM. BH Macro Limited 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 BH Macro Limited. In addition, BHMF is subject to an operational services fee of 50bps per annum. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS |
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FAS 157 Asset Valuation Categorisation1 |
Brevan Howard Master Fund Limited (the "Master Fund") Unaudited Estimates as at 30 September 2009
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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. |
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Manager Update |
Brevan Howard Offshore Management Limited (the "Manager") is manager of all the Brevan Howard branded funds, including Brevan Howard Master Fund Limited (the "Master Fund") and BH Macro Limited, and has responsibility for allocating capital to affiliated investment managers. Gunther Thumann, CEO of Brevan Howard Group Holdings Limited (the Manager's parent company) and Chairman of the Manager's Investment Committee, has provided the following update on the Manager's operations: All Brevan Howard hedge funds delivered another quarter of solid returns in Q3 2009, as detailed below:
Source: BHAM *The inception date of Brevan Howard Credit Catalyst Fund Limited Class A USD Shares was 1st August 2009.The monthly return for July 2009 represents the performance of the USD Class X Shares of Brevan Howard Credit Catalysts Master Fund Limited. Class X Shares are subject to a 20% performance fee, but no management fees are payable thereon. Therefore a simulated management fee of 2% per annum has been applied to the performance presented in this document for this period. No investor has received the above returns on a stand alone basis. So far this year the Brevan Howard funds have experienced investment inflows of approximately $5bn (as 1 October 2009). These inflows, together with performance take the total assets under management of the Manager to over $25.7bn (as at 30 September 2009). The investment managers to which we currently allocate assets are Brevan Howard Asset Management LLP, based in London, Brevan Howard (Hong Kong) Limited, based in Hong Kong and Brevan Howard (Israel) Limited, based in Tel Aviv. In addition, the Manager recently made an allocation to Brevan Howard Investment Products Limited, based in St. Helier, following the expansion of its operations in Jersey. We are also considering the establishment of additional affiliated investment managers in Singapore and/or Geneva. These jurisdictions have been chosen because they offer high quality infrastructure and a stable legal and regulatory environment. We believe that opening these offices will assist the Manager in attracting new talent and will also enable us to retain the services of existing Brevan Howard personnel who may wish to move to these jurisdictions. We will continue to seek further opportunities to avail our Funds of leading trading talent on a global basis; and to continue to broaden our investment management base commensurate with the growth of our assets under management. Some investors have raised the issue of the size of the AUM at Brevan Howard, and especially the size of the Master Fund. We remain confident that the current opportunity set remains exceptionally rich for all our Funds. The Master Fund in particular is having no trouble generating returns on its current assets. The NAV/Share of BH Macro Limited USD Shares has appreciated 17.08% YTD (as at 23 October 2009), even with much reduced balance sheet and gross exposures. The Master Fund's balance sheet is now approximately $17bn versus $62bn in January 2008 and gross interest rate swap risk is now 15% of the January 2008 level. The Master Fund has also essentially exited long-dated short option and other illiquid derivative positions. If and when we sense that a fund cannot deliver an attractive return because of the size of its assets relative to market opportunities, we intend to recommend to that fund's board to return capital to investors. For the time being however, we remain sanguine about the size of our AUM and confident that we can continue to generate attractive returns for our investors. |
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Investment Manager Update |
Brevan Howard Asset Management LLP ("BHAM") currently manages the largest allocation of the Master Fund's assets. BHAM's CIO, Alan Howard, has provided the following update to the Manager on BHAM's operations in the quarter: I'm delighted to report that BHAM has been able to significantly strengthen and deepen its senior trading team over the summer. In particular, we were very fortunate to have Mark Hillery join us from Tudor Capital Management and Fabrizio Gallo join us from Morgan Stanley. Mark was a senior partner and head of emerging markets trading at Tudor. I have known Mark for over fifteen years and had worked with him for seven years at Tokai and CSFB, prior to his joining Tudor. I know him to be an outstanding trader and I am confident that he will make a substantial contribution to the firm. Mark joins us as a Partner and senior macro trader. Fabrizio was most recently global head of equities at Morgan Stanley where he led one of the world's largest and most profitable equity franchises. Fabrizio joins us as a Partner and Head of Equities. In this capacity, he will take over the investment management of the Brevan Howard Equity Strategies Master Fund Limited, as well as build out a more meaningful equity trading effort for BHAM generally. Fabrizio not only brings his skills in the equity space to the firm, but also his broad insight into capital markets and his experience in managing a large and complex global business. I have no doubt that he also will make a substantial contribution to the firm. On a less positive note, we remain concerned about the potential impact of the EU Directive on the regulation of Alternative Investment Fund Managers and have been working with regulators, politicians and industry bodies such as AIMA to articulate these concerns. As I've often said, we at BHAM welcome effective regulation. We also understand that, as one of the largest hedge fund managers in the world, we have a responsibility to engage with regulators, central banks and governments to assist in any way possible in helping them understand what we do and to minimise systemic risk. To that end, I have joined the Investor Advisory Committee on Financial Markets which was established by the Federal Reserve Bank of New York. The role of this committee is to discuss financial, economic and public policy issues and advise the New York Fed on developments and issues arising in the asset management industry. We've also made ourselves available to any regulators or government body that wants to understand what we do. However we regard the current draft of the EU Directive as simply unworkable and in need of significant amendment. Over the last several months of discussions with regulators we have become increasingly comfortable that there is in fact no desire to harm the hedge fund industry and that there is broad acceptance that amendments must be made. We are therefore hopeful that the final form of the Directive will be sensible and proportionate; but we believe that it is important for all stake holders in our industry to continue to engage with regulators to ensure that whatever regulation is ultimately enacted does not do unintended damage. In terms of outlook, I don't think there has ever been a time when two extreme outcomes - an inflationary spike or deflationary bust - could be simultaneously argued with such great plausibility. The recovery we've had in financial markets has been almost entirely due to the massive policy response over the last year. The ultimate outcome of that response is simply unknowable. The only thing we're pretty confident about is that there will be a great deal of volatility over the next several years as market participants try to guess what policy makers are going to do next, when policy makers themselves likely have little idea what their next steps will be.
As always, I thank all of our investors for their continued support and I look forward to updating you again with a 2009 year-end letter in January 2010. |
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September 2009 Performance Review |
During the month, the Master Fund made money in fixed income directional and volatility trades. Smaller gains were made in credit strategies. The Master Fund suffered small losses in FX directional trades. The other asset classes did not contribute significantly towards P/L during the month. Monthly contribution (%) to basic performance by asset class:
- 'Other' includes non-trading items such as treasury returns. |
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Outlook |
The following is a report from Brevan Howard Asset Management LLP, the investment manager of Brevan Howard Master Fund Limited: US As economic data continued to improve in September, stocks rallied, credit spreads narrowed and mortgage rates fell. Manufacturing activity picked up in a range of industries and surged in auto-making, leading the ISM above 50 for the first time since the onset of the recession. Housing, which was the epicentre of the recession, is also slowly improving. Housing starts, sales and prices are all edging up, albeit from depressed levels. Stabilisation in house prices is especially welcome because it will bolster household and bank balance sheets going forward. Nevertheless, our cautious optimism for this sector is tempered by an appreciation of the important role played by government support. A milestone for whether housing can maintain its momentum will be the reaction when the Fed ends its MBS purchases in the first quarter of 2010. News relating to the consumer was mixed last month. On the one hand, retail sales rose having been flat all year. On the other hand, another dreary labour market report called into question the sustainability of any "pop" in consumer spending. Wage growth is slowing quickly and the economy shed around 200,000 jobs. To give some perspective on the damage suffered in the labour market, eight million jobs have been lost during the recession and over 40 million claims for unemployment insurance have been filed. The most important signal for a sustained upturn in the real economy will be a turn in the labour market. The slow but steady decline in inflation has gone almost unnoticed. Core inflation has dropped from 2.75% last year to less than 1.5% and threatens to grind lower. Low inflation enables the Fed to maintain an essentially zero interest rate policy for an "extended period", which encourages risk-taking. However, the downside risks to inflation would be particularly gruesome for household and bank balance sheets by increasing the real cost of servicing debt. Against this backdrop, policy makers appear content to watch assets melt up and patiently await what appears to be a tepid recovery by historical standards. We remain convinced the Fed will not derail the expansion by deviating from a "lower for longer" interest rate policy |
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Europe The data released in the EMU in September show that the rate of expansion of economic activity continued to improve, albeit at a slower pace than in previous months. The Composite PMI increased to 51.2 (i.e. in expansion territory for the second month in a row, but only by a further 0.7 points). The slower pace of the improvement is related to the end to government initiatives which boosted car sales and production over recent months. On the household side, the data flow continues to be mixed. EMU households have taken advantage of the generous government incentives and substantially increased their purchases of new cars until August. Excluding cars, however, retail sales fell in August and in Q3 are thus far below the average of Q2. Consumer sentiment is improving, but remains weak by historical standards. The labour market situation remains challenging, as the unemployment rate is at the highest level since the launch of the euro and remains a big concern for households. The pace of deterioration of the labour market has eased off over the last few months; but a further leg up in unemployment related to the end of the government subsidies to firms is a major risk going forward. Overall, the macro picture is consistent with the return to some positive growth in the second half of the year while inflationary pressures continue to be subdued due to large spare capacity. The EMU policy makers are still seriously concerned about the medium term sustainability of the ongoing recovery once the direct effects of the fiscal and monetary stimuli fade away. At its September meeting, the ECB presented its new macro economy projections, which still depict a dreadful outlook for the EMU well into next year. Consequently, the ECB maintained its accommodative monetary policy stance and it continued to monitor the market impact of its "enhancing credit support" program (i.e. long-term funding to banks and the purchasing of covered bonds). The long-term ECB refinancing operation at the end of September saw a lower than expected participation by banks. UK Activity data continued to improve in September, although manufacturing survey data eased back a little, perhaps as an earlier car-related boost unwound. Retail, labour market, housing and credit data all continued to improve. This is consistent with the return to moderate positive growth rates in activity that we expect. For the medium term, substantial headwinds remain as households and banks continue to repair balance sheets. There is some evidence that banks are easing credit conditions somewhat, more so on the corporate side than on the household side, due to extensive policy support for the banks directly and for the economy more generally. Nevertheless, given the remaining headwinds, a swift return to above-trend growth rates remains unlikely. The inflation outlook is mixed: the weaker currency has kept core and headline inflation stubbornly high. But wage inflation remains very low, and the extent of spare capacity is substantial. In the short term, the risk is that the upward momentum in core inflation continues, with VAT changes adding to the volatility. Downside pressures from spare capacity are likely to emerge at some stage, but the timing and magnitude of this is uncertain. House prices are rising at a rapid rate, although transaction volumes remain near record lows. Against this background, the Bank of England kept rates unchanged in September and continued with its gilt purchase programme, on course to reach its GBP175bn target by the end of October. Japan Economic activity levels continued to improve in Japan in September, following a robust August. This brings growth in Japan over recent months to one of the highest levels amongst leading global economies. However, this should be put into the context of the magnitude of output losses suffered at the end of 2008/beginning of 2009, which have only been partially recovered. As such, deflationary pressures continue to affect Japan, both in the goods and the labour markets. The appreciation of the Yen is also compounding downside pressure on prices. In August, the core CPI (excluding food & energy) fell at a rate of -0.9% year-on-year, which is close to the record low of -1.1% in early 2001. However, in Japan, like in many other regions, there is a loss of momentum. Last month's increase in the PMI was the smallest since the recovery phase started in February. Furthermore, while consumer spending seems to have remained relatively robust in September due to the support provided by fiscal measures, the lasting weakness in the labour market and the ongoing deterioration of labour income cast doubts on the sustainability of consumption going forward. It is likely that the quickest phase of the economic rebound in Japan is behind us. |
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Enquiries |
Northern Trust International Fund Administration Services (Guernsey) Limited Harry Rouillard +44 (0) 1481 74 5315 |
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YOUR ATTENTION IS DRAWN TO THE DISCLAIMER SET OUT AT THE BEGINNING OF THIS DOCUMENT. © BREVAN HOWARD ASSET MANAGEMENT LLP (2009). ALL RIGHTS RESERVED. ADV01844
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