Brevan Howard Global commentary for the month ended August 31, 2016.
BH Global Limited (“BHG”) is a closed-ended investment company, registered and incorporated in Guernsey on 25 February 2008 (Registration Number: 48555).
Prior to 1 September 2014, BHG invested all its assets (net of short-term working capital) in Brevan Howard Global Opportunities Master Fund Limited (“BHGO”). With effect from 1 September 2014, BHG changed its investment policy to invest all its assets (net of short-term working capital) in Brevan Howard Multi-Strategy Master Fund Limited (“BHMS” or the “Fund”) a company also managed by BHCM.
[drizzle]Brevan Howard Global was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 29 May 2008.
Monthly Performance Review for Brevan Howard Global
The information in this section has been provided to BHG by BHCM.
BHG Monthly Commentary
The NAV per share of BHG’s USD shares appreciated by 0.10% and the NAV per share of BHG’s GBP shares depreciated by 0.14% in August 2016.
Brevan Howard Master Fund Limited (“BHMF”)
The NAV per share of BHMF Class Z USD shares appreciated by 0.01% in August. Interest rate trading generated small overall gains from directional and curve positions. Short positions in USD and EUR rates, and long positioning in the UK over the Bank of England’s interest rate cut, all contributed. Further small gains in interest rates were generated by basis trading in the US. Interest rate volatility trading generated small losses overall as gains from Sterling and European volatility trades only partially offset losses from long positions in Japanese volatility. Emerging Markets trading and Japanese swap spreads also were small detractors. In FX, losses mostly came from EUR currency trading as well as AUD and NZD. Gains from directional positioning in GBP and JPY partially offset these losses. Credit gains were generated across several trading books from positions in Asset Backed Securities as well as US mortgage agency debt, while equity trading lost money from Japanese equity volatility positions as well as US and European directional trading.
Brevan Howard Asia Master Fund Limited (“BHA”)
The NAV per share of BHA Ordinary USD shares appreciated by 0.21% in August. The main detractor of performance in August was due to the sell-off and flattening of the Korean interest rate curve. Offsetting gains in FX came from a combination of long positioning in volatility and gamma across a variety of G10 and Asian currencies as well as directional trading of USDJPY. Further gains came from volatility trading in US interest rates and to a lesser degree equity trading.
BH-DG Systematic Trading Master Fund Limited (“BHDGST”)
The NAV per share of BHDGST Class Z USD shares depreciated by 2.34% in August. In fixed income, BHDGST recorded losses primarily due to long positions in European and US bond futures as yields rose and prices fell. Improving US economic data and a more hawkish FOMC saw US bonds sell-off, while European bonds came under additional pressure from seasonally light QE buying from the ECB ahead of heavy Government debt issuance. Within short term interest rate futures, a short exposure to Canadian Bankers’ Acceptance notes and a long exposure to Eurodollar futures were both significantly reduced. Short Sterling was the only market to see risk increased, with a small addition made to an already sizeable long, taking exposure in this market to 27%/NAV. Long equity exposure to Asia and the US performed particularly well. With some key macro data recovering, particularly across the US & Emerging markets, and a growing interest across developed economies in alternative policy action via fiscal stimulus, risk assets were well supported. With volatility depressed amid a quiet summer and markets unable to break out of increasingly narrowing trading ranges, the extra yield offered by emerging markets attracted strong inflows after a period of protracted underperformance. BHDGST increased its net equity risk across all geographies in August to 80%/NAV. The biggest winners throughout the month were the NASDAQ and Hang Seng indices as 12bps and 10bps respectively.
Direct Investment Portfolio (“DIP”)
The DIP appreciated by 0.50% in August. The DIP generated the bulk of its profits in credit where smaller gains across ABS/MBS, corporate credit and agency trading contributed positively. Additional gains arose in GBP interest rates but the gains were partly offset by losses in JPY interest rates. In FX, gains from short exposure to GBP and JPY were offset by losses from long exposure to the EUR towards the end of August. In equity, a modest short exposure to European equity indices generated small losses. Long exposure to oil generated small gains.
Manager’s Market Review and Outlook
The information in this section has been provided to BHG by BHCM.
The highly anticipated August report on the labour market was mildly disappointing in each of its major components. Job gains slowed from the robust pace set in the prior three months. The unemployment rate was unchanged at 4.9%, which is the same rate seen at the beginning of the year. In addition, broader measures of labour market slack are approximately unchanged since the start of the year. The work week was revised down and ticked down further still. Finally, indicators of wage growth were soft and are showing only moderate gains over the last year. Putting those pieces together, it looks like the labour market is slowing a little rather than strengthening.
By contrast, the early readings on current-quarter growth have improved. The sizable inventory liquidation that subtracted from real GDP over the last year appears to be reversing, adding to growth noticeably. Apart from the inventory swing, the positive trend in consumption spending has been maintained, albeit at a slower rate than the outsized gain in the second quarter. Business fixed investment appears to be treading water, which is better than the outright declines in prior quarters. Residential investment also seems to be stabilising in the face of strong underlying fundamentals, including attractive mortgage rates, tight inventories, and positive demographic trends.
Inflation continues in a narrow channel. Core personal consumption expenditure inflation in August was 1.6% over the last year, the same rate as at the start of the year. Headline inflation has been stuck below 1% for most of the year, weighed down by past declines in energy prices that should lift over the next year.
The Federal Reserve (“the Fed”) tried in August to send a consistent message about the likelihood of further gradual rate hikes. Chair Yellen in Jackson Hole said the case for hikes had “strengthened” and Vice Chair Fischer didn’t rule out a faster pace of rate increases than present, discounted by market pricing. Other Fed officials were generally supportive of the thrust of the Chair’s message while being noncommittal about the exact timing. In Presidential politics, the national polls generally favoured Secretary Clinton over Mr Trump by a small margin as the campaign season entered its final stage. Since the campaign has been light on policy specifics, investors are left to wonder what the next administration will