Brevan Howard, DW part with smile

In an industry infamous for furious rifts, bruised egos, messy business divorces and vicious litigation, the partnership between Brevan Howard Capital Management LP and its protege, DW Partners LP, is one of the few to end amicably.

On Jan. 1, New York-based DW Partners assumed full control of $5.8 billion in credit strategies it subadvised for Brevan Howard, the British hedge fund giant.

DW Partners legally became the investment manager for the assets, in two LP vehicles for two credit hedge fund strategies, said David Warren, founder and chief investment officer.

DW was launched in 2009 with backing from Brevan Howard and eventually managed two credit hedge fund strategies bearing the Brevan Howard name: Credit Catalysts, with assets totaling $4.75 million as of Sept. 30, and Credit Value, which ran $900 million as of the same date.

With minimal fuss and the blessing of more than 90% of the 150 external investors invested in the credit limited partnerships, the transfer was made and the LP funds were renamed effective Jan. 1.

Brevan Howard retained $1.5 billion in DW credit strategies and continues to use DW as a manager for some of its hedge funds. Brevan Howard also took a minority stake in DW Partners. Mr. Warren declined to give the size.

The balance of the $6 billion DW managed as of Jan. 1 is from external clients.

On the surface, the two firms could hardly be more different. Mr. Warren was an experienced credit trader who ran a 300-person proprietary bond trading desk for Morgan Stanley before leaving in 2008. He always specialized in “complexity,” focusing on corporate, structured and asset-backed securities, investments that generally require a long holding period, often several years, to achieve full valuation, he said during a recent interview.

Brevan Howard Capital Management, on the other hand, runs a big global macro trading program. The firm was co-founded in 2002 by Alan E. Howard and four others in St. Pelier, Jersey. It also has a London-based investment subsidiary, Brevan Howard Asset Management LLP.

“Trading is not a buy-and-hold strategy,” said Nagi Kawkabani, a Brevan Howard Asset Management partner, in a 2012 interview with Pensions & Investments (P&I, Oct. 1, 2012). “Trading focuses on near-term opportunities,” he said.

Even among global macro trading companies, BHAM is renowned for an extraordinarily low tolerance of poorly performing traders. “Traders compete against the market and against other traders. High turnover is part of the business model. We give someone a chance ... but we do have to cut traders when they are not performing,” Mr. Kawkabani said in the interview.

Brevan Howard managed $27 billion as of Jan. 1, after the credit funds moved to DW Partners, Bloomberg reported. Its flagship global macro hedge fund, Brevan Howard Master fund, has been closed to new investors for some years.

Brevan Howard spokesmen Max Hilton and Anthony Payne did not respond to repeated calls and e-mail requests for comment by press time. Requests for interviews with Mr. Howard or other senior executives were not answered.

Mr. Warren said his relationship with Brevan Howard began in 2008, when he was hired by Mr. Howard and given the freedom to build a credit business over the next year. “Alan needed a business builder, not another one-off macro trader,” Mr. Warren said.

“DW and Brevan Howard are like oil and water,” he added. “We are U.S.-centric and focused on long-term credit investments. They are European macro traders, but we are very complementary and share a similar risk profile.”

Once the original 12-member credit team was assembled in 2009, DW Investment Management was established as a separate legal entity. The firm started managing a portion of the BH Master fund as well as part of another multistrategy fund in credit strategies. The Credit Catalysts strategy was launched in 2009. When the DW team found a need for a credit strategy with a longer lockup period of two years, the Credit Value strategy was launched in 2012.

Part of DW's success was simply good timing, sources said. Pairing up with Brevan Howard was the “logical place to go in 2008. Times were tough back then and David didn't have a lot of options as someone who came out of a bank without a track record,” said a source familiar with both companies who spoke on condition of anonymity.

“Alan gave David an investment platform on which to hone his investment craft and to build a track record. Credit has never been part of Alan's DNA. He's a macro guy to the core who uses a little credit in his strategy now and then, and he really needed a decent credit manager then,” the source said.

“A credit manager making a leap in 2008 was perfect timing,” said Michael Falk, a partner at Focus Consulting Group Inc., Long Grove, Ill., a consultant to investment firms. “At that point, credit was like picking up dollar bills off the street. Even a mediocre credit manager could make a lot of money.”

“Alan saw the potential in credit after the financial crisis and needed a good manager to exploit the opportunity,” Mr. Falk said. “DW came on and did a good job, but as a subadviser, you give up a fair amount of the cash flow. That is a strong incentive to go independent,” Mr. Falk added.

Observers said Mr. Warren made smart moves from the outset that ensured a smooth departure when he was ready to go it alone.

Legally separating itself from Brevan Howard made it much easier for DW Partners to take on full management of its own investment portfolios, said Kevin P. Quirk, co-founder and partner of Casey Quirk & Associates LLC, Darien, Conn., a consultant to money management firms.

“DW was built from the outset with the potential to become an independent company, which is unique among hedge funds,” Mr. Quirk said.

The classic hedge fund model is to establish a multistrategy fund with someone in the middle, directing traders who are constantly coming and going.

“It's difficult for that kind of model to spawn good spinoffs,” Mr. Quirk said, adding that “the hedge fund business is long on investment prowess and short on business management skill. That is partially the result of the short-term, returns-oriented focus. There aren't many examples in the industry of hedge fund companies where managing the company is as important as managing the business.”

As for DW Partners' future, Mr. Warren said now that his investment team is free from the constraints of subadvisory work, it can provide institutional investors with more customization.

“I can't tell you the number of times that a client has said `We like these three things in your strategy, but the other things overlap too much with what's in our other managers' portfolios,'” Mr. Warren said. “From here on, we can potentially offer more of an a la carte version of our strategies.”

In addition to customized separate accounts, co-investment with institutional investors in special opportunities too big for the diversified credit strategies is on the drawing board. n

Bloomberg contributed to this story.