Hedge Fund Brevan Howard’s Fortunes Blighted by Billions in Outflows and Management Row
Macro Hedge Fund Treads a Rocky Road
For more than a decade, Brevan Howard traced a smooth upward path to become one of the most powerful hedge funds in Europe. In recent months, its fortunes have waned.
Its commodities fund was closed following a run of poor performance; assets under management dropped, with billions flowing out of its flagship fund in the second half of 2014; it posted its first-ever yearly loss and two of its co-founders locked horns in a high-profile legal dispute.
Brevan is headed by Switzerland-based billionaire Alan Howard and cemented its reputation by making big gains during the credit crisis. Mr. Howard, 51 years old, who was born in England, ranked 12th in a recent list of the greatest hedge-fund managers compiled by LCH Investments NV, with net gains of $17.4 billion since his fund’s inception.
Brevan is part of a group known as macro hedge funds, many of which have struggled in recent years. Macro funds bet on bonds, currencies and other assets and try to predict major shifts in financial markets. But macro funds have found it tough to identify big trends to bet on, partly because of central-bank policies aimed at kick-starting global growth, said Sam Diedrich, who manages about $1.1 billion at Pacific Alternative Asset Management Co. LLC and invests in macro funds.
Quantitative easing “has created a low-volatility environment where currencies didn’t move and rates didn’t move,” he said.
Brevan’s run of redemptions is particularly significant because the fund has in the past been viewed as one of the most attractive in the world. Its “one in, one out” policy limited the number of investors that could become clients.
Recently, though, the flow of money has mostly been out of Brevan’s flagship Master fund. While Brevan keeps a tight grip on its numbers, the fund suffered a long run of outflows in the second half of last year, according to calculations by The Wall Street Journal, based on investor letters. Investors withdrew a net $4.2 billion between the end of May and the end of December, according to the Journal’s data.
The firm’s total assets, including the Master fund, dropped to $32.8 billion at the end of December from $37.3 billion at the end of May.
Performance has also dropped off sharply. Brevan’s Master fund posted eye-catching gains of more than 20% both in 2007 and 2008, benefiting from correct bets on interest-rate and currency movements, among other trades. But in 2012 and 2013, the fund recorded only small gains of 3.9% and 2.7% respectively, according to investor letters reviewed by the Journal. In 2014, for the first time in the Master fund’s 12-year history, it recorded a loss of 0.8% after making incorrect bets on Japanese equities and U.S. bond yields.
During the first half of last year, Brevan shifted gears, reducing its exposure to equity and currency markets and returning to a greater focus on trading interest rates—the specialty of its founders.
Brevan’s other funds have also encountered problems. It closed the $630 million Brevan Commodities Strategy fund, the Journal reported in November, after the fund was hit with big losses as a result of incorrect bets on oil prices.
Brevan Howard co-founder Alan Howard in Beverly Hills, Calif. ENLARGE
Brevan Howard co-founder Alan Howard in Beverly Hills, Calif. PHOTO: PRENSA INTERNACIONAL/ZUMA PRESS
Meanwhile, Mr. Howard got into a public spat with Brevan co-founder Chris Rokos over a noncompete agreement. The two settled the dispute out of court, though not before some of the inner workings of the firm were exposed in court filings. The dispute was resolved last month and Mr. Howard agreed to invest in Mr. Rokos’s new fund.
Investors globally continue to put money into hedge funds, according to Hedge Fund Research. The sector as a whole attracted net inflows of $76.4 billion last year, the highest level since 2007.
Some investors say the tide could be about to turn in favor of macro funds, which could benefit from divergent monetary policy and different growth trajectories in Europe, Japan and the U.S., for instance.
One bright spot for Brevan Howard was that it avoided the carnage that wreaked havoc in other parts of the hedge-fund industry last month when the Swiss National Bank unexpectedly removed its long-standing cap on the Swiss franc. The Journal reported that Brevan, which had been profiting from a negative bet on the Swiss franc against the dollar, cut this back shortly before the SNB’s surprise move. Brevan’s Master fund gained 0.8% in the week to Jan. 16, taking gains for this year to 1.9%.
Brevan’s flagship fund gained around 3% in January, said a person familiar with the matter. Its smaller, computer-driven fund that bets on market trends made double-digit gains last year and is up again this year.