A name synomyous with the high-rolling hedge fund gains pre-2008, Brevan Howard's fortunes haven't been so bright in recent years but a spike in market volatility is cause for optimism, a senior figure says.

The end of the current bull market in equities and a period of almost unnatural calm have been predicted for so long that investors’ may think that the trees will now grow to heaven. 

And yet it is precisely at such times that asset allocators need to be particularly careful. How best to insure portfolios when or if volatility spikes?

Long periods of low volatility haven’t been kind to the BH Macro Limited, a London-listed fund that taps into the Brevan Howard Master Fund managed by Brevan Howard, one of Europe’s best-known alternative asset management businesses. But a recent rise in volatility, encouraged when investors fretted about Italian politics, saw BH Macro shares chalk up a gain of 8 per cent in May – a strong result. It trades at an 8-9 per cent discount to net asset value. Its YTD performance is 9.13 per cent. This means it has outperformed the FTSE 100 Index of UK blue-chip stocks, which has been flat since January. Who said the era of hedge fund cleverness was over?

Those figures provided an auspicious backdrop when this publication recently spoke to BH Macro’s chairman, Huw Evans. He argued that such results might remind investors that a fund designed to prosper when market conditions are difficult is smart portfolio insurance, even if that is going to cost the investor during the easy times.

“They [shareholders] regard an investment in BH Macro as an insurance policy in the event that markets go down. Wealth managers, in particular, realise there will be rainy days at some point,” Evans said. 

In recent years some shareholders have pulled out, but those who have remained on board hold the fund as an insurance against market volatility, and that approach has started to show dividends, as recent net asset value figures demonstrate, he said.

The board has agreed that if the price of either class of shares trades at a discount to NAV averaging 8 per cent or more over the course of 2018 that the company will ask shareholders of that class to vote on whether to liquidate, Evans continued. “We are focusing this year more than ever before on performance,” he said. 

Brevan Howard may not regain the full fizz of old, but such recent performance will cheer an investment organisation, founded in 2002 and which in 2013 boasted around $40 billion in AuM, becoming one of the largest such firms in Europe. Performance issues saw that AuM decline, accompanied by some shrinkage in headcount. The business was co-founded in 2002 by former Credit Suisse traders Alan Howard, Jean-Philippe Blochet, Chris Rokos, James Vernon, and Trifon Natsis. In a move widely commented upon at the time, Brevan Howard shifted its HQ to Geneva (seen as a way to reduce tax burdens) and opened an affiliate business in New York. 

There has been a period of retrenchment, as has occurred among much of the hedge fund sector in recent years. And now, a key to continued growth for this business will be, as Evans’ comments make clear, whether it can profit from the mis-pricings and disclocations that volatile markets – as seen in periods when the firm boomed – can generate. 

One attraction, Evans argues, for holding shares in BH Macro is that this is a cheap, easy way to buy portfolio insurance when compared with buying exotic derivatives (often off-limits to non-professional investors anyway). And the Company may also gain more traction as the case for active management returns to favour if there is a market downturn. The popularity of index-tracking “passive” funds is easy to explain when markets rise relentlessly. 

Evans notes that the BH Macro is a vehicle with limited exposure to equities.   “For investors who are mostly committed to equities and perhaps property it is a great portfolio diversifier,” he said.

As any buyer of insurance knows, it is easy to feel that paying those premiums is money down the drain when nothing bad happens. The benefits only come through when the storms hit. A measure, perhaps, of what an odd business finance can be is that funds such as BH Macro will prove their worth during the tough times, just as they did when the financial markets went “pop” 10 years ago.