Brevan Howard runs $50 billion unit like BlackRock’s Aladdin

Brevan Howard is making money for its billionaire co-founder Alan Howard and other partners through more than just hedge fund fees.

The investment firm best known for running macro trading strategies has persuaded the likes of SoftBank Group Corp., hedge fund Penso Advisors and 15 others to use its high-tech operational infrastructure that once only served as the trading backbone for Brevan Howard's more than $40 billion in assets.

The Brevan Howard platform, which was spun off in 2018, is similar to the pioneering Aladdin software that BlackRock Inc developed. The unit, called Coremont, has grown to service more than $50 billion in assets for mainly alternative money managers trading everything from stocks and bonds to cryptocurrencies, Coremont CEO Jev Mehmet said in an interview.

"What was built is scalable, so we thought there was definitely mileage in extending the platform to the wider investment community," he said, adding that he expects to double assets and clients in three years.

From offering bespoke investment strategies and prized research to letting external clients use the plumbing that drives trading, hedge funds have been laboring to ease pressure on revenues as investors demand a better deal from an industry notorious for charging high fees.

For Brevan Howard, the additional revenue — a few basis points of every $100 that goes through Coremont — is a vital source of fees after it saw a vast majority of its hedge fund assets flee since the peak in 2013. Assets have only now started to rebound from a low of about $6 billion two years ago after the firm posted one of its best-ever gains last year.

When Mr. Mehmet formalized the idea in 2017 of externalizing the platform and persuaded Howard to spin off the service, he found it wasn't a tough sell.

Back then, Brevan Howard was under pressure from years of mediocre returns. Clients were fleeing. Howard had been forced to cut fees and fire dozens of staff. The firm, after reversing its decision to focus on its main fund, had started giving its star traders their own money pool to run.

"I identified that our platform, driven by our proprietary analytics, was our crown jewel and Alan did not take much persuading at all about the merits of going forward with this," Mr. Mehmet said.

BlackRock's Aladdin, which services trillions of dollars for institutions to manage their portfolios and understand risk exposures, has shown how lucrative the business can be. Developed as a tool to help BlackRock measure its own financial risk, the firm now sells the software to rival asset managers and other institutions.

Aladdin has become a prized product at the world's largest asset manager. In 2020, BlackRock earned more than $1 billion in technology services revenue, a category that includes sales of Aladdin software.

Brevan Howard is among the latest entrants into a small but growing list of asset managers trying to monetize their in-house expertise built over decades of trading experience. Quantitative hedge fund Winton Group spun off a data unit that collects, cleans and enriches complex datasets in 2017 as a separate service, while Amundi announced the creation of a new business line, Amundi Technology, earlier this month.

"This is indeed a good way to scale up business and diversify revenue," said Bloomberg Intelligence senior analyst Sarah Jane Mahmud. "At the moment, it seems to be quite a concentrated industry but is becoming more competitive."

Coremont took Cove Capital as its first client when founder Louis Basger started the macro hedge fund firm. Mr. Basger eventually joined Brevan Howard last year. Landseer Asset Management, an equity long-short money manager recently spun out of hedge fund CQS, is also a client, while SoftBank uses the platform for its investments in equities and equity derivatives.

Others are signing up. Coremont had added eight new clients over the COVID-19 lockdown, taking the total number to 17. Headcount has doubled to more than 200 people and the firm is in advanced conversations with traditional asset managers, sovereign wealth funds and sell side institutions to turn them into clients, Mehmet said.

Coremont's revenue for the year ending March 31, 2020 was £27.4 million ($38 million), up from £23.9 million a year earlier, according to a filing with the U.K.'s Companies House.

Its growth comes as Brevan Howard, now under the leadership of its chief executive Aron Landy, has started to grow assets again. The firm managed $13.7 billion at the end of February, according to an investor document seen by Bloomberg. Mr. Landy is spearheading a project to move the firm away from being a founder-led hedge fund toward a broader financial-services operation.

For its part, Coremont is busy building its infrastructure. It offers portfolio management technologies, risk management and analytics; executes and processes trades; and helps funds handle regulatory reporting and investor relations.

The firm is building out its cryptocurrency offerings in collaboration with Elwood Asset Management, an affiliate firm. It's also working with SIG Technologies, a quant trading platform spun off from Brevan Howard, to allow clients research, back-test and automate execution.

Coremont's success coincides with rising pressure on fees and mounting costs for the hedge fund industry. That has in turn led money managers to outsource their non-core functions to external firms.

"The industry right now, because of cost pressures, is more disposed to outsourcing than it has been at any point in my career," Mr. Mehmet said.