BREVAN HOWARD MULTI-STRATEGY MASTER FUND LIMITED

BREVAN HOWARD MULTI-STRATEGY MASTER FUND LIMITED

 

MONTHLY SHAREHOLDER REPORT:

 

FEBRUARY 2014

 

BMSNL20140228 CONFIDENTIAL DO NOT COPY OR DISTRIBUTE

 

© Brevan Howard Capital Management LP (2014). All Rights Reserved.

 

 

Your attention is drawn to the disclaimer at the beginning and end of this document

BREVAN HOWARD MULTI-STRATEGY

 

MASTER FUND LIMITED

 

MONTHLY SHAREHOLDER REPORT: FEBRUARY 2014

 

T +44 (0)20 7022 6250   www.brevanhoward.com

 

Important Legal Information and Disclaimer

 

This document has been prepared by, and is being communicated outside the United States of America and Hong Kong by, Brevan Howard Asset Management LLP (“BHAM”). BHAM is authorised and regulated by the Financial Conduct Authority of the United Kingdom (the “FCA”). This document relates to the fund or funds referred to herein (each, a “Fund” and collectively the “Funds”), which are managed by Brevan Howard Capital Management LP (“BHCM”). BHCM, BHAM and each of their affiliates are collectively referred to in this document as “Brevan Howard”. The investment strategies described herein may involve one or more entities which are part of the Brevan Howard group of companies and certain of the functions described herein may be performed by employees of affiliates of BHAM.

 

This document has been provided specifically for the use of the intended recipient only and must be treated as proprietary and confidential. It may not be passed on, nor reproduced in any form, in whole or in part, under any circumstances without express prior written consent from BHAM. Without limitation to the foregoing, any text and statistical data or any portion thereof contained in this document may not be permanently stored in a computer, published, rewritten for broadcast or publication or redistributed in any medium, except with the express prior written permission of BHAM.

 

This document is provided for information purposes only and does not constitute an invitation, solicitation or offer to subscribe for or purchase any of the investments, products or services mentioned herein, nor shall it, or the fact of its distribution or communication, form the basis of, or be relied on in connection with any contract. This document is not intended to constitute, nor should it be construed as, investment advice. Potential investors in any investments, products or services referred to in this document or to which this document relates should seek their own independent financial, legal and taxation advice. Any offer to invest in a Fund may only be made on the basis of the relevant approved prospectus or offering memorandum relating to that Fund, which must be received and reviewed prior to any investment decision and which may contain information which is different from the information and opinions contained in this document. This document is not intended to provide a sufficient basis on which to make any investment decision.

 

Any estimated net asset values contained in this document are based on unaudited estimated valuations compiled by BHAM. Final month-end net asset values are determined by the relevant Fund’s administrator and may be materially different from any estimated valuation. Any estimates may be subject to error and significant fluctuation, especially during periods of high market volatility or disruption. Any estimates should be taken as indicative values only and no reliance should be placed on them. Estimated results, performance or achievements may differ materially from any actual results, performance or achievements.

 

The information, data and opinions contained in this document are for background purposes only, are not purported to be full or complete and no reliance should be placed on them. BHAM believes (but has not necessarily verified) that the sources of the information, data and opinions contained in this document are reliable. However, neither BHAM nor any of its affiliates gives any guarantee, representation, warranty or undertaking, either express or implied, regarding and accepts no liability, responsibility or duty of care for, the accuracy, validity, timeliness or completeness of any such information, data or opinion (whether prepared by BHAM, any of its affiliates or by any third party) or that it is suitable for any particular purpose or use or it will be free from error. To the extent that any further information, data or material is provided in relation to the investments, products or services referred to herein, no representation is made that any such further information, data or material will be calculated or produced on the same basis, or in the same format, as contained in this document. No obligation is undertaken to update any information, data or material contained herein.

 

Certain information contained in this document may be “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, ‘should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, “continue”, “target”, “believe”, the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in such forward-looking statements.

 

This document is only being made available to, and the investments (including in relation to the Funds), products and services referred to herein are only available to, such persons and in such jurisdictions as they may be lawfully promoted, offered and provided. The information herein should not be relied or acted on by any other person.

 

Interests in the Funds have not been and will not be registered under any securities laws of the United States of America or any of its territories or possessions or areas subject to its jurisdiction, and may not be offered for sale or sold to nationals or residents thereof except pursuant to an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and any applicable state laws. This document is only being provided to United States persons who are “accredited investors” as defined in Regulation D under the Securities Act and “qualified purchasers” as defined in the U.S. Investment Company Act of 1940, as amended, and the rules promulgated thereunder. The Funds and any other investments, products or services described in this document are only available to such persons.

 

In the United States, this document is communicated by Brevan Howard US LLC, a Delaware limited liability company, which acts as non-exclusive placement agent with respect to the sale of interests to certain investors in the Funds, and may provide such investors with marketing and other materials on behalf of Brevan Howard and the Funds. Brevan Howard US LLC is registered as a broker-dealer under the U.S. Securities Exchange Act of 1934, as amended, and under various state securities laws, and is a member of the Financial Industry Regulatory Authority, Inc.

 

In the United Kingdom, this document is directed only at, and made available only to, professional clients and eligible counterparties (as defined in the FCA Handbook). This material is not intended for use by, or directed at, retail customers (as defined in the FCA Handbook). BHAM neither provides investment advice to, nor receives and transmits orders from, investors in any Funds nor does it carry on any other activities with or for such investors that constitute “MiFID or equivalent third country business” (as defined in the FCA Handbook).

 

Persons in Australia should note that (a) each of BHAM and Brevan Howard (Hong Kong) Limited (“BHHK”) is exempt from the requirement to hold an Australian financial services licence under the Australian Corporations Act 2001; (b) BHAM is authorised and regulated by the FCA under UK laws and BHHK is licensed and regulated by the Securities and Futures Commission under Hong Kong

BREVAN HOWARD MULTI-STRATEGY

 

MASTER FUND LIMITED

 

MONTHLY SHAREHOLDER REPORT: FEBRUARY 2014

 

T +44 (0)20 7022 6250   www.brevanhoward.com

 

laws, each of which differ from Australian laws; and (c) any views expressed, or financial product advice provided, by a representative of BHAM or BHHK is made on behalf of BHAM or BHHK, as appropriate, only and no other BH group entity.

 

In Hong Kong, this document is directed only at, and made available only to, professional investors as defined in the Securities and Futures Ordinance (Cap. 571, the laws of Hong Kong, “the Ordinance”) and its subsidiary legislation. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has not been registered by the Registrar of Companies in Hong Kong. The Fund is a collective investment scheme as defined in the Ordinance but has not been authorised by the Securities and Futures Commission pursuant to the Ordinance. Accordingly, the shares in the Fund may only be offered or sold in Hong Kong to persons who are “professional investors” as defined in the Ordinance and any rules made under the Ordinance or in circumstances which are permitted under the Companies Ordinance (Cap. 32, the laws of Hong Kong) and the Ordinance. In addition, this document may not be issued or possessed for the purposes of issue, whether in Hong Kong or elsewhere, and the shares in the Fund may not be disposed of to any person unless such person is outside Hong Kong, such person is a “professional investor” as defined in the Ordinance and any rules made under the Ordinance or as otherwise may be permitted by the Ordinance. Brevan Howard (Hong Kong) Limited is licensed for Type 1 (dealing in securities), 4 (advising on securities), 5 (advising on futures contracts) and 9 (asset management) regulated activities by the Securities and Futures Commission with central entity number AKO483.

 

PLEASE REFER TO THE “FURTHER IMPORTANT INFORMATION” CONTAINED AT THE END OF THIS DOCUMENT (INCLUDING, WITHOUT LIMITATION, THE SECTION HEADED “RISK FACTORS”)

 

Brevan Howard Multi-Strategy Master Fund Limited (the “Fund”) is incorporated in the
Cayman Islands as an open-ended investment company. Brevan Howard Multi-Strategy
Fund Limited (“BHMSFL”) and Brevan Howard Multi-Strategy Fund, L.P. (“BHMSFLP”)
invest  all  of  their  assets  (net  of  short-term  working  capital)  in  the  Fund.  BHMSFL,
BHMSFLP and the Fund shall be referred to herein as the “Funds”.
Brevan Howard Multi-Strategy Fund Limited
	USD	Type	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	YTD
	2008	Class A			-3.27	-2.32	0.31	2.05	0.37	0.61	-4.05	1.10	2.97	-0.79	-3.21
	2009	Class A	4.17	2.06	1.29	1.11	3.06	-0.63	1.55	0.73	1.42	0.96	0.39	0.13	17.41
	2010	Class A	-0.15	-0.60	-0.16	0.75	-0.19	0.52	-0.97	0.89	1.20	0.53	-0.02	0.32	2.12
	2010	Class E										0.60	0.01	0.38	0.99
	2010	Class F												0.38	0.38
	2011	Class A	0.04	0.63	0.25	1.43	-0.09	-0.78	1.64	3.68	-1.05	-0.33	0.34	-0.59	5.20
	2011	Class E	0.08	0.71	0.30	1.55	-0.06	-0.80	1.78	3.96	-1.08	-0.32	0.40	-0.60	5.98
	2011	Class F	0.08	0.71	0.30	1.55	-0.06	-0.80	1.78	3.96	-1.08	-0.32	0.40	-0.60	5.98
	2012	Class A	1.12	0.96	-0.47	-0.04	-0.30	-1.27	1.24	0.55	1.47	-0.57	0.63	1.24	4.61
	2012	Class E	1.23	1.06	-0.47	-0.01	-0.29	-1.32	1.35	0.62	1.60	-0.58	0.70	1.35	5.34
	2012	Class F	1.23	1.06	-0.47	-0.01	-0.29	-1.32	1.35	0.62	1.60	-0.58	0.70	1.35	5.34
	2013	Class A	1.40	0.32	0.17	1.59	-0.64	-1.96	-0.36	-0.97	0.03	-0.04	0.93	0.25	0.67
	2013	Class E	1.52	0.38	0.21	1.72	-0.64	-2.06	-0.32	-0.93	0.08	0.00	0.98	0.27	1.16
	2013	Class F	1.52	0.38	0.21	1.72	-0.64	-2.06	-0.32	-0.93	0.08	0.00	0.98	0.27	1.16
	2014	Class A	-0.85	-0.49*											-1.33*
	2014	Class E	-0.81	-0.44*											-1.25*
	2014	Class F	-0.81	-0.44*											-1.25*
	EUR	Type	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	YTD
	2008	Class A			-3.05	-2.24	0.43	2.19	0.53	0.75	-4.16	0.93	3.09	-0.60	-2.36
	2009	Class A	4.52	2.03	1.41	1.04	2.91	-0.60	1.51	0.74	1.42	0.95	0.42	0.07	17.60
	2010	Class A	-0.19	-0.67	-0.17	0.77	-0.23	0.55	-0.96	0.94	1.07	0.53	0.01	0.31	1.96
	2011	Class A	0.07	0.66	0.27	1.41	0.02	-0.72	1.75	3.75	-1.06	-0.33	0.40	-0.64	5.64
	2011	Class E		0.74	0.32	1.53	0.05	-0.74	1.90	4.03	-1.09	-0.31	0.46	-0.65	6.33
	2012	Class A	1.11	0.94	-0.47	-0.07	-0.34	-1.28	1.27	0.53	1.42	-0.59	0.61	1.21	4.37
	2012	Class E	1.22	1.04	-0.47	-0.04	-0.33	-1.30	1.35	0.60	1.55	-0.59	0.68	1.32	5.09
	2013	Class A	1.31	0.32	0.15	1.54	-0.66	-1.93	-0.34	-0.97	0.00	-0.04	0.93	0.22	0.47
	2013	Class E	1.43	0.38	0.20	1.68	-0.67	-2.02	-0.30	-0.93	0.04	0.00	0.97	0.25	0.97
	2014	Class A	-0.85	-0.49*											-1.34*
	2014	Class E	-0.81	-0.45*											-1.25*

 

GBP	Type	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	YTD
2008	Class A				-2.15	0.53	2.11	0.46	0.68	-3.55	1.09	3.20	-0.62	1.58
2009	Class A	3.86	2.10	1.23	0.77	2.73	-0.63	1.51	0.74	1.43	0.96	0.41	0.11	16.24
2010	Class A	-0.14	-0.56	-0.08	0.72	-0.13	0.49	-0.96	0.92	1.16	0.53	0.01	0.36	2.33
2011	Class A	0.05	0.64	0.28	1.39	-0.04	-0.75	1.64	3.73	-1.07	-0.32	0.36	-0.58	5.35
2011	Class E							0.00	3.99	-1.10	-0.31	0.42	-0.59	2.36
2012	Class A	1.12	0.98	-0.45	-0.03	-0.30	-1.23	1.25	0.56	1.45	-0.56	0.64	1.23	4.71
2012	Class E	1.23	1.07	-0.45	0.00	-0.29	-1.28	1.37	0.63	1.58	-0.57	0.72	1.34	5.44
2012	Class F				0.00	-0.36	-1.60	1.71	0.68	1.58	-0.56	0.71	1.34	3.50
2013	Class A	1.43	0.35	0.18	1.57	-0.64	-1.88	-0.32	-0.93	0.05	-0.02	0.93	0.27	0.92
2013	Class E	1.55	0.40	0.23	1.71	-0.65	-1.97	-0.28	-0.89	0.09	0.02	0.98	0.27	1.40
2013	Class F	1.55	0.40	0.23	1.71	-0.65	-1.97	-0.28	-0.89	0.09	0.02	0.98	0.27	1.40
2014	Class A	-0.83	-0.47*											-1.29*
2014	Class E	-0.79	-0.43*											-1.21*
2014	Class F	-0.79	-0.43*											-1.21*

 

JPY	Type	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	YTD
2010	Class A					-0.24	0.51	-1.02	0.83	1.19	0.50	-0.08	0.27	1.96
2011	Class A	0.04	0.62	0.25	1.39	-0.10	-0.80	1.58	3.65	-1.06	-0.34	0.30	-0.67	4.86
2012	Class A	1.09	0.96	-0.50	-0.06	-0.31	-1.34	1.25	0.53	1.45	-0.60	0.62	1.22	4.34
2013	Class A	1.44	0.32	0.16	1.63	-0.66	-1.85	-0.36	-0.98	0.03	-0.06	0.99	0.24	0.85
2013	Class E	1.57	0.37	0.20	1.77	-0.67	-1.94	-0.32	-0.94	0.08	-0.02	1.04	0.26	1.35
2014	Class A	-0.86	-0.50*											-1.36*
2014	Class E	-0.82	-0.46*											-1.28*

 

Source: NAV performance data provided by the administrator, International Fund Services (Ireland) Limited (“IFS”).

 

The performance set out above is net of all investment management fees (2% annual management fee payable at feeder fund level, 0.5% annual management fee payable at master fund level and 25% performance fee for Class A Shares; 1.5% annual management fee payable at feeder fund level, 0.5% annual management fee payable at master fund level and 20% performance fee for Class E Shares) and all other fees and expenses payable by BHMSFL / the Fund.

 

* Estimated by BHAM as at 28 February 2014, based on performance data provided by IFS.

 

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

 

 

 

NAV per Share             Brevan Howard Multi-Strategy Fund Limited

 

	USD	EUR	GBP	JPY
Class A	127.18	128.29	133.07	11,125.73
Class E	112.88	111.65	108.36	10,028.61
Class F	112.19	–	103.91	–

 

Estimated by BHAM as at 28 February 2014, based on performance data provided by IFS.

 

 

 

 

 

 

Fund Update                Following  the  departure  from  Brevan  Howard  of  Geraldine  Sundstrom,  the  portfolio manager  of  the  Brevan  Howard  Emerging  Markets  Strategies  Fund  (“BHEMS”),  the BHEMS board of directors determined to return investors’ capital. As part of the re-allocation of BHMS’s redemption proceeds, the Investment Committee (“IC”) approved an increased allocation to the Direct Investment Portfolio (“DIP”) of BHMS. The increased allocation to the DIP will give the IC greater flexibility to allocate capital directly to traders across the Brevan Howard group. The IC believes the increased flexibility and direct exposure to additional senior traders will benefit the return profile of the BHMS.

 

Allocations of the Fund estimated as at 28 February 2014 (allocations are subject to change):

 

Investment	Allocation (% NAV)
Brevan Howard Master Fund Limited	48.3%
Brevan Howard Credit Catalysts Master Fund Limited	16.0%
Brevan Howard Systematic Trading Master Fund Limited	8.1%
Brevan Howard Commodities Strategies Master Fund Limited	6.0%
Brevan Howard Asia Master Fund Limited	5.0%
Brevan Howard Emerging Markets Local Fixed Income Leveraged Master Fund Limited	2.8%
Brevan Howard Emerging Markets Strategies Master Fund Limited	0.2%
Direct investment portfolio and treasury	13.7%

 

Source: BHAM; figures rounded to one decimal place.

 

Exposures of the Fund by asset class estimated as at 28 February 2014 (allocations are subject to change):

 

Asset Class	VaR** by asset class as a % of total VaR
IR	27%
Vega	12%
FX	15%
Equity	12%
Com	23%
Credit	11%

 

** Calculated using historical simulation based on a 1 day, 95% confidence interval.

 

Source: BHAM.  Figures are rounded to the nearest whole number.

 

 

 

Performance Review Monthly, quarterly and annual contribution (%) to the performance of BHMSFL Class A USD Shares (net of fees and expenses) by strategy group

 

	Macro	Rates	FX	EMG	Equity	Commodity	Credit	Systematic	Total
February	-0.82	-0.02	-0.03	-0.04	-0.02	0.26	0.21	-0.03	-0.49
QTD	-1.23	-0.03	-0.01	-0.30	-0.05	0.32	0.47	-0.49	-1.33
YTD 2014	-1.23	-0.03	-0.01	-0.30	-0.05	0.32	0.47	-0.49	-1.33

 

Monthly, quarter-to-date and year-to-date figures are estimated by BHAM as at 28 February 2014, based on performance data for each period provided by the Fund’s administrator, IFS.

 

Methodology and Definition of Monthly Contribution to Performance:

 

Attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.

 

The above strategies are categorised as follows:

 

“Macro”: multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates)

 

“Rates”: developed interest rates markets “FX”: global FX forwards and options “EMG”: global emerging markets

 

“Equity”: global equity markets including indices and other derivatives “Commodity”: liquid commodity futures and options

 

“Credit”: corporate and asset-backed indices, bonds and CDS “Systematic”: rules-based futures trading

Monthly Performance of Underlying Funds

 

The share classes of the underlying funds in which the Fund invests do not charge any performance or management fees. Therefore, the performance figures listed below in respect of the underlying funds are gross returns calculated before the deduction of any fees.

 

Performance fees and management fees (2% annual management fee payable at feeder fund level, 0.5% annual management fee payable at master fund level and 25% performance fee for Class A Shares / Series A Interests of the feeder funds of the Fund; 1.5% annual management fee payable at feeder fund level, 0.5% annual management fee payable at master fund level and 20% performance fee for Class E Shares) are payable by shareholders on the return made by the Fund on its investments in the underlying funds.

 

Investment	MTD performance (%) (Estimated as at 28
	February 2014)
Brevan Howard Master Fund Limited Class Z USD	-1.02
Brevan Howard Asia Master Fund Limited USD	0.27
Brevan Howard Emerging Markets Strategies Master Fund Limited Class Z	0.12
USD
Brevan Howard Credit Catalysts Master Fund Limited USD	1.58
Brevan Howard Commodities Strategies Master Fund Limited USD	4.63
Brevan Howard Systematic Trading Master Fund Limited Class Z USD	-0.20
Brevan Howard Emerging Markets Local Fixed Income Leveraged Master	-2.56
Fund Limited Class A USD

 

Source: BHAM

 

* The USD currency class of each underlying fund is used as a proxy for the performance of each of the underlying funds; the Fund also invests in the EUR, GBP and JPY classes of the underlying funds.

 

Source: Underlying data for the funds in which the Fund invests in is provided by their respective administrators, calculations by BHAM.

 

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

 

The NAV per share of BHMSFL Class A USD Shares depreciated by an estimated 0.49%, BHMSFL Class E USD Shares depreciated by an estimated 0.44% and BHMSFL Class F USD Shares depreciated by an estimated 0.44% (net of fees) in February.

 

Brevan Howard Master Fund Limited (“BHMF”)

 

The NAV per share of BHMF Class Z USD Shares depreciated by an estimated 1.02% (net of fees) in February.

 

During the month, BHMF suffered losses mainly in macro equity trading and in FX trading and to lesser extent in EUR interest rate trading. These losses were partially offset by small gains in credit trading and in interest rate trading in currencies other than USD and EUR.

 

 

Brevan Howard Asia Master Fund Limited (“BHA”)

 

The NAV per share of BHA Ordinary USD Shares appreciated by an estimated 0.27%

(net of fees) in February.

 

During the month, BHA made gains in China FX, US interest rate trading and equities. These gains were partially offset by losses incurred in Japanese and Korean interest rate trading as well as in FX strategies.

 

 

Brevan Howard Emerging Markets Strategies Master Fund Limited (“BHEMS”)

 

The NAV per share of BHEMS Class Z USD Shares appreciated by an estimated 0.12% (net of fees) in February.

 

 

Brevan Howard Credit Catalysts Master Fund Limited (“BHCC”)

 

The NAV per share of BHCC Ordinary USD Shares appreciated by an estimated 1.58% (net of fees) in February.

 

During February, corporate strategies produced nearly 60% of returns, led by performing long / short positions. Just over 40% of monthly returns came from the MBS / ABS book, where commercial mortgage backed positions posted the strongest gains for the month, continuing the trend from January.

 

 

Brevan Howard Commodities Strategies Master Fund Limited (“BHCS”)

 

The NAV per share of BHCS Ordinary USD Shares appreciated by an estimated 4.63% (net of fees) in February.

 

In a generally supportive commodity environment, gains came primarily from energy strategies as well as in base metals, which offset losses in precious metals and agricultural markets.

 

 

Brevan Howard Systematic Trading Master Fund Limited (“BHST”)

 

The NAV per share of BHST Class Z USD Shares depreciated by an estimated 0.20% (net of fees) in February.

 

During the month, BHST made gains in equity index futures and energy futures trading. However these were offset by losses in all other strategies.

 

 

 

Brevan Howard Emerging Markets Local Fixed Income Leveraged Master Fund Limited (“BEL”)

 

The NAV per share of BEL Class A USD Shares depreciated by an estimated 2.56% (net of fees) in February.

 

During February, the net exposure to emerging market currencies moved from slightly short to marginally long. The net exposure to emerging market interest rates remained short. The interest rate and foreign exchange positions accrued losses.

 

The temporary disruptions that have slowed economic activity this winter are beginning to

abate. Payroll employment rose 175,000 in February, returning to the average monthly

gains seen over the prior six and twelve months. Although the unemployment rate ticked

up to 6.7%, most of the increase was accounted for by a rise in the participation rate. In

addition, initial claims for unemployment insurance have retraced the run-up seen since

last November when the bad weather began.

The bad weather is not the only reason why growth has disappointed in the current

quarter. Coming into this year, manufacturers needed to tap the brakes on the pace of

inventory investment, especially in the automobile sector where stocks had ballooned

compared with sales. As a result, surveys of purchasing managers suffered and factory

output declined. However, new orders rose in the most recent surveys, a development

that points to growing production in the coming months.

The housing sector has been slow to digest last year’s big increases in mortgage rates

and house prices. At the same time as affordability has dipped, builders have been

disciplined about adding new homes. As a result, housing investment and turnover have

slowed noticeably. It is anticipated that this will take a few quarters to work through but

will ultimately prove to be a temporary drag as well. The fundamentals in housing are still

favourable. Even though affordability has declined, housing is still relatively cheap by

historical  standards  and  compared  with  rents.  With  household  formations  running

significantly  above  new  production  of  homes,  there’s  a  need  for  increased  housing

investment. Looking forward over the next year, housing is expected to be a tailwind for

growth albeit a much more modest one compared with the big addition seen earlier in the

expansion.

Inflation remains stuck in low gear. Headline and core prices rose a little over 1% in the

last year. Soft inflation owes mainly to deflation in goods prices, which depends heavily

on import prices, which in turn depends heavily on global growth. While global growth

disappoints, there’s little reason to think there will be significant upward pressure on US

inflation any time soon.

In terms of monetary policy, the Federal Reserve policymakers have signalled that they

are broadly comfortable with their plan for the slow removal of accommodation which was

put in place last December. They plan to end asset purchases later this year so long as

there is not a significant change in the outlook. As the unemployment rate has fallen

quickly, they will have to tweak their forward guidance before long. In particular, the 6.5%

threshold for the unemployment rate is nearly obsolete. Although there’s some debate, it

appears that the Fed will eventually settle on qualitative guidance that de-emphasizes the

unemployment rate in favour of a broader dashboard of indicators as a guide to when to

expect rate hikes.

EMU

In its monthly policy meeting in March, the ECB Governing Council decided to leave the

key interest rates unchanged while refraining from adding any other liquidity measure.

The ECB also published a new set of macro projections forecasting an inflation rate of

well below the ECB definition of price stability throughout the whole forecasting period, encompassing for the first time 2016. The policy decision, together with the tone of a press conference hinting at reluctance by the ECB to stimulate the economy any further despite the disappointing inflation outlook, contributed to spark a renewed appreciation of the Euro, which risks compounding the strong disinflation trend.

 

In the last quarter of 2013, eurozone GDP expanded by a relatively robust 0.3% q/q, ahead of consensus expectations, but in line with our forecasts. The flow of actual indications on economic activity – namely retail sales and industrial production – at the beginning of this year showed a rebound in January following a disappointing December. Car registrations in the first two months of 2014 were instead lower, largely as a payback for the bounce in the last quarter of 2013. Moreover, in February the PMI survey showed an improvement in the business sector, led by services, as the Composite PMI improved further from 52.9 to 53.3 – the highest level since June 2011 – led by stronger business services, while manufacturing softened somewhat. However, the Retail PMI, not included in the Composite PMI, fell back below the 50 threshold from 50.5 to 48.5, indicating a possible renewed setback of retail sales after a strong January. The annual growth rate of eurozone broad money M3 recovered modestly in January from its sharp deceleration in December, when banks sold government bonds and reduced their overnight deposits ahead of the ECB’s asset quality review snapshot. Bank lending numbers remained largely unaffected by the snapshot, and the annual growth rate of credit to the private sector remained unchanged in January as well. Overall, the money and credit figures remain weak in all countries and are consistent with further disinflationary pressures down the road. The flash measure of euro area HICP inflation remained unchanged at 0.8% y/y in February, as a noisy jump in French inflation, only partly related to a VAT increase, more than offset the decline in most of other countries. The final February figures as well as the March readings will shed light on whether inflation remains on a downward trend, and whether this trend is consistent, or lower, than the newly published ECB forecasts.

 

 

UK

 

The ongoing theme in the UK data is strong growth with weak inflation. Monthly business indicators over the past months have stabilised at high levels or eased back slightly, but have generally remained resilient. Consumer confidence has risen back to pre-crisis levels. Unemployment claims data point to ongoing improvement in the labour market, consistent with above-trend growth. While some moderation in growth is expected in the next few quarters, the data have, if anything, been a little more resilient than had been expected. The composition of growth is also becoming better balanced, which reduces the risk that it will fall back sharply. The initial growth pick-up relied heavily on housing and consumption. Moreover, that consumption acceleration was largely financed with a reduction in savings, as real incomes remained broadly stagnant. But more recent data show improved balanced growth in two respects. First, investment is making an increasing contribution to growth, and with investment intentions at cyclical highs this strength looks set to continue at least in the near term, offsetting the drag from slowing consumption growth. Second, with inflation falling further below target but some increase in wage inflation due to a stronger labour market, real household incomes are set to rise. While consumption growth has slowed from its unsustainable pace in mid-2013, these real income developments are likely to put consumption growth on a sounder footing for 2014. External rebalancing remains a more distant prospect, as this relies on eurozone

demand improving by more than currently seems likely. Inflation remains benign and continues to surprise the Bank of England (“BoE”) on the downside. Headline inflation has fallen to 1.9%, core is at 1.6% (both at the lowest since 2009). Wage inflation, on the other hand, shows some early signs of improving from its historical lows of around 1%. As the year progresses, wage inflation is expected to normalise further, although since productivity growth is also expected to improve this would not represent a rise in underlying inflationary pressure.

 

The BoE announced in February that there would be no further quantitative guidance once the 7% forward guidance unemployment threshold is reached, likely within the next few months. Instead, the BoE has announced its intention (but not commitment) not to hike in the near term, to hike only gradually once hikes start, and to hike to a level well below historical estimates of the neutral rate. The main reason why quantitative guidance has been dropped is that the BoE faces significant uncertainties over the required path of interest rates, linked closely to the uncertainty about productivity. If productivity growth does not pick-up, wages cannot sustainably pick-up either. The recovery would likely fizzle out. If productivity growth does pick-up (still the BoE’s forecast) growth will become more sustainable. But such productivity-led growth would also generate very little inflation pressure. The case for rate hikes would mostly rest on a desire to move away from emergency policy settings, rather than a need to curtail immediate inflation pressures.

 

 

Japan

 

Real GDP rose 0.7% in the fourth quarter of 2013, disappointing the market consensus. However domestic demand was solid with PCE posting a decent rate of increase and business investment rising rapidly. Soft export demand and a sharp run up in imports held down the top line. There is some thought that importers moved goods to be set up for a first quarter surge in demand as purchasers front run the consumption tax increase. However, imports rose at a robust rate earlier in 2013, and it is clear that there have been some structural changes in the balance of domestic and foreign production. Increased petroleum and LPG demand due to the nuclear-plant shutdowns explains only a fraction of the deterioration in the trade balance. At a higher frequency, industrial production rose in January with significant increases across a range of industries.

 

 

Recent survey data are mixed. The Shoko-Chukin survey of small and medium enterprises moved up in February to its highest level since 1990. In contrast, the Composite PMI as well as consumer confidence declined. Views on employment have held up, but income and livelihood measures have weakened since spring 2013, perhaps reflecting angst over the balance between prospective wage increases and inflation, including the upcoming consumption tax hike. The Economy Watchers survey diverged with the current conditions index holding up but the future conditions index softening.

 

The latest consumer price data were disappointing. Western core prices declined -0.1% on a seasonally-adjusted basis in January across the country and were flat in February in Tokyo. Base effects may support gains in the year-on-year increase over the next couple months, but progress is expected to plateau without a further acceleration in the underlying trend. In that regard, the authorities are hopeful that, as the momentum from energy-cost increases and the sharp depreciation in the yen falls, an increase in inflation expectations as well as wage and margin increases from tightening labour markets and a

narrowing output gap are able to take up the baton. However timing is particularly tricky. Some important information on wages will be available in mid-March when large companies are expected to announce their reactions to union wage demands. The authorities are banking on some increase in base wages (as opposed to bonus payments). Such an increase would be the first in a long time and would go a long way to establishing a higher rate of inflation expectations and national confidence in Abenomics more generally. Increases among large corporations would also put pressure on small and medium-sized corporations. Not to be ignored is the 8% wage increases scheduled for Government workers, as the wage cut they took a few years ago to help pay for earthquake reconstruction is unwound.

 

 

China

 

In February, the key themes were the Renminbi (“RMB”) depreciation late in the month and the continuation of a cyclical slowdown. The market has now reached consensus that the currency depreciation was a deliberate policy move, with a twofold motivation: the

 

People’s Bank of China (“PBoC”) intention (i) to show that the RMB can move in both directions and thus reduce speculative positioning; and (ii) to close the gap between spot and fixing rates while preparing to widen the RMB fluctuation band. The latest currency movement followed a 3% appreciation in 2013, which attracted capital inflows betting on a RMB appreciation. As a consequence of the PBoC’s intervention, the one week

 

SHIBOR rate collapsed from mid-4% to 1.7% and was still low at 2.1% as at 3 March.

 

The policymakers’ focus is still most likely on the onshore CNY market, rather than on

 

CNH structured products. The impact of this depreciation on the behaviour of the onshore corporate sector is not known yet, while the media says that the SAFE has required banks to estimate this impact.

 

Recently published statistics in January and February on activity in China have been disappointing. Business surveys – namely the HSBC and the official PMI – indicated a further slowdown from the cyclical peak recorded in the third quarter of 2013. In particular, the HSBC Composite PMI, encompassing both manufacturing and services, fell back below the 50 threshold, from 50.8 to 49.8. Industrial production, fixed asset investments and retail sales have all showed a meaningful slowdown, largely undershooting market expectations. After a largely seasonal rebound in January, both money and credit aggregates showed a continuation of a moderate deceleration trend on a 3m/3m seasonally-adjusted metric in February.

FURTHER IMPORTANT INFORMATION

 

Past performance is no guarantee and is not indicative of future results.

 

The information herein reflects prevailing conditions and Brevan Howard’s judgments as of this date, all of which are subject to change. Any portfolio characteristics and risk controls set forth are not static and may change over time. Neither BHAM nor its affiliates represent that any statistics, investment guidelines, capital allocation and limits disclosed herein will remain constant over time.

 

Any projections or analyses contained or relating to the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any such projections or analyses should not be viewed as factual and should not be relied upon as an accurate prediction of future results.

 

Any hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, hypothetical or simulated results do not represent actual trading and similar investment opportunities may not be available in practice. Also, since the investments represented thereby do not represent actual investments, hypothetical or simulated results may under- or over-compensate for the impact, if any, of certain market factors, such as lack of liquidity or market disruptions. Hypothetical or simulated investment performance data is also subject to the fact that it is designed and prepared with the benefit of hindsight.

 

Risk Factors

 

Acquiring an investment in a Fund or any of the other products or services described herein may expose an investor to a significant risk of losing all or a substantial amount of the amount invested. Any person who is in any doubt about investing in a Fund or any of the other products or services described herein should consult an authorised person specialising in advising on such investments, products or services. Any person making an investment in a Fund must be able to bear the risks involved, which include, besides such other risks as may be described in any prospectus or offering memorandum for the relevant Fund, the following:

 

The Funds are speculative and involve substantial risk and may have limited, or no, operating history.

 

The Funds will be leveraged and will engage in speculative investment practices that may increase the risk of investment loss. The Funds will invest in illiquid and volatile securities.

 

Investments in the Funds are subject to restrictions on transfer, withdrawal and redemption and should be considered illiquid.

 

As there is no recognised market for interests in the Funds (and no secondary markets are expected to develop), it may be difficult for an investor to realise its investment or to obtain reliable information about its value or the extent of the risks to which an investor is exposed through its investment.

 

Past results of the Funds’ investment managers are not necessarily indicative of future performance of the Funds, and the Funds’ performance may be volatile.

 

While the Funds are subject to market risks common to other types of investments, including market volatility, the Funds employ certain trading techniques, such as the use of leverage and other speculative investment practices that may increase the risk of investment loss.

 

The investment managers have total investment and trading authority over the Funds, and the Funds are dependent upon the services of the investment managers. The use of a single advisor could mean lack of diversification and, consequently, higher risk.

 

The Funds are not required to provide periodic pricing or valuation information to investors with respect to individual investments. The Funds are not subject to the same regulatory requirements as mutual funds or other regulated fund products.

 

The Funds and their managers are subject to conflicts of interest.

 

Changes in interest rates or exchange rates may have an adverse effect on the value, price or income of interests in the Funds. A portion of the trades executed for the Funds may take place on markets outside the United States and the United Kingdom.

 

The Funds are dependent on the services of certain key personnel, and if certain or all of them were to become unavailable, the Funds may prematurely terminate.

 

The Funds’ managers will receive performance-based compensation, which may give such managers an incentive to make riskier investments than they otherwise would and may offset the Funds’ trading profits.

 

The Funds’ incentive and performance-based compensation, fees and expenses may offset their trading and investment profits. The Funds may involve complex tax structures and there may be delays in the provision of important tax information to investors.

 

Returns generated from an investment in a Fund may not adequately compensate investors for the business and financial risks assumed.

 

The Funds may make investments in securities of issuers in emerging markets. Investment in emerging markets involves particular risks, such as less strict market regulation, increased likelihood of severe inflation, unstable currencies, war, expropriation of property, limitations on foreign investments, increased market volatility, less favourable or unstable tax provisions, illiquid markets and social and political upheaval.

 

Any prospective investor in a Fund must review the risk disclosures in the prospectus or other offering memorandum for that Fund prior to making any investment.

2-2014 CVRF Monthly Commentary