BH Global Shines Amidst Covid-19 Chaos
Equity investors have been hurt considerably in 2020; in March alone, the S&P500 Index ended the month down approximately -16% and the FTSE100 was down approximately -14%. Diversifying products like hedge funds have fared slightly better - the HFRX Equity Hedge Index, which tracks the performance of a basket of equity hedge funds (reporting daily data to industry tracker HFR) is down -9.53% in March. This negative performance, however, underscores the challenges of the broader hedge fund industry to generate positive returns during periods of high market volatility.
Finding green shoots in equities and hedge funds isn’t easy, but enter BH Global Limited (BHGG), one of Brevan Howard’s two London Stock Exchange-listed closed-ended investment companies (the other being BH Macro Limited). Its stock price ended March up +10.5% versus a 12.4% rise in the GBP share class NAV (to March 27) which reflects the fact that BHGG invests essentially all of its capital in Brevan Howard’s Multi-Strategy Master Fund, a Cayman islands-domiciled global macro hedge fund.
Yet the UK-listed stock trades at a discount to the most recent estimated NAV. Sir Michael Bunbury, Chairman of BHGG, isn’t surprised by the stock price lagging the consistent outperformance of the fund NAV, however.
“I have the highest regard for Brevan Howard as a firm; they are extraordinarily good at risk control,” he said. “I think the market has not really grasped how good the NAV performance has been. It’s a very pleasant thing for the Chairman to see the NAV growing substantially.”
The listed hedge fund sector has shrunk considerably in the past ten years. Many closed due to returns underperforming broader equities markets and the rise of liquid alternative funds (like UCITS funds in Europe) offered better liquidity and the opportunity to liquidate at the prevailing NAV of the share class. Indeed, many listed funds trade at a discount to the underlying NAV of the fund, which may put the listed vehicle investor at a disadvantage compared to those invested in the underlying fund when seeking to redeem.
Macro hedge funds, however, tend to do better in times of equity market distress; in 2008, the HFRI Macro Index was up +4.83% and is down only -0.33% through the end of February this year. Managers of these funds tout their lack of correlation to equity and credit markets. Due to this minimal, near zero, correlation to equities and credit, BHGG offers considerable downside protection during periods of market turbulence. For example, during the last five years there have been five months - January 2016, October 2018, December 2018, May 2019 and March 2020 - when the S&P 500 index dropped by more than 5% and BHGG was up in all of them. Indeed, BHGG has had only one down year – 2015 when its GBP share class fell 1.3% – since it listed in May 2008.
Some institutional investors, however, won’t allocate directly to hedge funds and many high net worth and family office investors, even if they meet the accredited/professional investor requirements set by regulators, can’t afford the minimums. Using listed vehicles like BHGG is a way to gain exposure to these kind of investment strategies in a listed investment company format and is something Bunbury urges investors of all kinds to consider.
“It’s useful to have assets that are not correlated with equities and make money when equities are falling. The function of BHGG is not to try and outsmart equities in a bull market; it’s to provide a balance of safe haven assets,” he said.
No-one knows when the world economy will begin to emerge from its current turmoil and some observers say that it could get worse before it gets better. Meanwhile, investors like Pershing Square Capital Management's Bill Ackman have spoken about the potential for bargains given the current state of equity markets and others have said that equities have further to fall when companies report their Q1 and Q2 financials. Bunbury urges caution.
“Apart from a few setbacks, equities have had an unprecedentedly long run since March 2009 but people with experience know they won’t go up forever,” he said. “Equity investors had no idea what was going to hit them in February and March this year. Equities are an underlying route into the real-world economy; they’re clearly going to take a material hit because of the shutdown in so many countries and they will take time to recover. A prudent portfolio manager should have a good look at whether they hold safe harbour assets to offset the risk. BHGG gives investors access to Brevan Howard’s proven high-quality risk management in a listed vehicle that can diversify their portfolios.”
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