2013 was a difficult year for traders along the yield curve, and Brevan Howard, Europe’s largest hedge fund with approximately $40 billion under management, was no exception.
The Class A Brevan Howard’s Master Fund Limited ended 2013 up just 2.59%, leading Alan Howard, the fund’s portfolio manager and namesake, to term the performance “somewhat disappointing,” according to an investor letter reviewed by ValueWalk. The fund, known for its trading along the yield curve, found 2013 to be more profitable in foreign exchange and equity markets. The fund also noted that it is looking to expand its trader head count and will be hiring from large banks that face regulatory headwinds in their proprietary trading divisions.
The letter says 2013 performance was driven by three major themes: the “Japan Trade,” the U.S. recovery and deflationary pressures in Europe. Among these strategies, only the position in EU interest rates failed to generate profits.
When considering Japan, the letter notes that “under Prime Minister Abe’s stewardship policymakers in Japan were finally committed to taking extraordinary measures in order to reflate their economy. As a consequence, we were long Japanese equity indices and short the Yen.”
Brevan Howard: Call on US economy accurate, but…
In addition to being right on Japan, the fund’s primary call on the U.S. economy was accurate, but the choice of asset class to execute the trade might not have been as beneficial as investors might have hoped. “Believing that the US economy would outperform its trading partners and that the Federal Reserve would start to move towards reducing its extraordinarily accommodative policy stance at some point in 2013,” the letter said, making the correct macroeconomic call, “we went long the USD vs a basket of other currencies.” While the long dollar trade did spike in price mid-summer, it ended up only slightly on the year, while the U.S. equity markets finished up nearly 30%.
Brevan Howard: Let the winners run, cut the losers quickly
Addressing a key issue with hedge fund management, the legendary trader spoke a phrase commonly heard in professional circles: “Going forward, we will continue to ‘press’ winners, but recognize that we must also focus on better protecting gains,” the letter said. In trading, the size of win relative to the size of loss is considered an internal barometer of success.
Brevan Howard sees many of the same themes playing out in 2014. “Japanese authorities remain determined to reflate the Japanese economy and, even if they eventually fail, will take extraordinary steps in an attempt to achieve this goal,” the letter said. “The long European rates trade also seems to offer potential. Now that the Fed has finally started to exit its extraordinary asset purchase program in the US, we would expect the opportunity set to trade both US rates and the US dollar to markedly improve. The one way bet on Fed accommodation since 2008 has made trading the US dollar and US rates a frustrating exercise for the last several years. Fed policy is no longer a one way bet and the fact that the interest rate curve is as steep as it has been for decades demonstrates the broad range of expectations about future policy. As events unfold, we expect the volatility and trading ranges for both the dollar and rates to expand materially, providing opportunities to take advantage of significant two-way moves in price, curve shape.”
Brevan Howard: Adding head count
Brevan Howard continues to press on with a corporate re-organization, moving offices from London and around the world. The U.S. office in New Jersey now has nearly 50 employees, which could grow according to their recent letter. “We have taken the opportunity to hire a significant number of seasoned traders from banks following the introduction of much tighter regulatory constraints on their ability to take proprietary risk.”