'Lion hunter'

Brevan Howard attracting institutions

Manager's performance, inflows make it a bigger player in global arena

Brevan Howard Asset Management LLP, already widely acknowledged as the largest European pure-play hedge fund manager, is fast approaching the top of global hedge fund rankings.

Despite flat performance for the first six months of 2012, Brevan Howard moved up to the third spot in Pensions & Investments' most recent ranking of the world's largest hedge funds from fourth, thanks to net asset inflows of $5.7 billion in the year ended June 30 (P&I, Sept. 17).

So far, 2012 has been an active year for London-based Brevan Howard, which added new institutional clients such as the $47.9 billion Pennsylvania Public School Employees' Retirement System, Harrisburg; the $122 billion New York City Retirement Systems; the $3.7 billion Leona M. and Harry B. Helmsley Charitable Trust, New York; and the $69.9 billion New Jersey Division of Investment, Trenton.

Described as employing a “pretty simple strategy: We trade,” by Nagi Kawkabani, a Geneva-based founding partner, Brevan Howard's worldwide assets grew 18.4% to $36.7 billion in the year ended June 30. In just the next two months, the company's assets grew by an additional $1.3 billion to $38 billion as of Aug. 31.

“Trading focuses on near-term opportunities ... that we may hold between one and six months,” Mr. Kawkabani stressed. “Investing puts more focus on finding value. Trading is not a buy-and-hold strategy. We aren't at the interesting end of the investment spectrum.

“The commonality in Brevan Howard is trading,” he said, noting that 80 of the firm's 400 employees are traders and each represents a separate profit-and-loss center.

“Traders compete against the market and against other traders. High turnover is part of the business model. We give someone a chance, shorten the odds by providing them with the support they need, but we do have to cut traders when they are not performing,” Mr. Kawkabani said.

"Kill or be killed'

As for conviviality of Brevan Howard's culture, “if you have been at the short end of the stick, you probably don't think it's a very collegial place. It's probably a lot warmer when you're generating a profit,” said an investment consultant who declined to be named.

The source said the firm's collective conscience is “the purest expression of the lion-hunter ideology: Kill or be killed. It's a very mercenary culture.”

The firm has closed its flagship Brevan Howard Master Fund Ltd., a global macro trading vehicle, at $25 billion, after trimming the fund last September, returning the $2 billion of profits to investors. But its nine other strategies are open, including credit, commodity, managed futures and emerging markets macro funds.

Brevan Howard's success is an example of institutional investors' craving for strategies that offer uncorrelated returns — such as global macro, managed futures, commodities and real assets — since the quant crash of 2007 and the global financial crash of 2008, sources said.

Brevan Howard isn't the only manager of trading-oriented strategies that has attracted the attention of institutional investors: Half of the 10 largest hedge fund managers in P&I's recent ranking manage one or more of these strategies, including Bridgewater Associates LP, Man Group PLC, BlueCrest Capital Management LLP and Winton Capital Management Ltd.

“I think of the top global macro managers as the 3Bs — Bridgewater, Brevan Howard and BlueCrest,” said another investment consultant who asked not to be named.

“Since 2007, all three managers have provided good returns, strict risk management, good information ratios and a steady-as-you-go approach without any beta exposure. All three have produced the uncorrelated returns they promised and that is why, to a great extent, they have brought in so much new business from institutional investors,” the consultant said.

The company received $2 billion to manage in the global macro fund from Credit Suisse Private Bank when a team of 25 left the investment bank in 2002, led by the head of proprietary trading, Alan Howard. He became Brevan Howard's founding partner. Assets grew steadily to $10.5 billion at the end of 2006.

But for Brevan Howard, 2007 proved to be the watershed year “when people started noticing us,” primarily because of that year's 25% return of the Brevan Howard Master Fund, Mr. Kawkabani said.

“It was important to have generated returns in times of stress. Our strategy tends to do well when the markets do not,” Mr. Kawkabani added.

262% growth since 2007

Brevan Howard's overall growth has been extraordinary — 262% — since the beginning of 2007 as returns of the global macro fund continued to be strong during down markets and positive, albeit flattish, during bull market runs.

The Brevan Howard Master Fund (A shares) returned 20% in 2008, for example, when major market indexes plummeted: The Standard & Poor's 500 index was down 36.9%; the Russell 3000 index swooned 37.3%; the Morgan Stanley (MS) Capital International All County World index declined 41.7%; and the Barclays Capital U.S. Aggregate Total Bond index was up 5.24%.

In 2009, when equity indexes all topped 25%, BHMF returned 18.7%; in 2010, the return of the macro fund was more characteristically flat at 1%, while equity market indexes topped 13%; and in 2011, the fund was up 12.2%, when U.S. equity market indexes produced returns between 1% and 2% and the MSCI ACWI declined 6.7%.

Since inception in April 2003 through Aug. 31, the Brevan Howard Master Fund returned an annualized 12% with a standard deviation of 6.98%. With that long-term return, sources said Brevan Howard has not had to market its wares.

“If you perform, you will win all the business in the world. If you don't perform, you will lose it,” Mr. Kawkabani said. Rather than market, he said, Brevan Howard generally runs a “reverse inquiry business. When someone sends an RFP, we have a good team that will respond.” n

This article originally appeared in the October 1, 2012 print issue as, "Brevan Howard attracting institutions".