Brevan Howard meets retail demand for credit

Retail investors can now buy into the credit long/short fund of Europe’s largest hedge fund for as little as $10 a share.

Investors who thought the regular coupon from ­fixed-income instruments made them ‘safe’ investments found out otherwise in Europe’s sovereign crisis, as the value of Greek debt and some banks plunged last year.

Downgrades and price slumps hit a number of ­peripheral European and other bank and national paper. Some have still not yet recovered to pre-crisis price levels.

The slump and rebound were just the latest reversal of fortunes in the volatile, ‘safe’ asset class. According to Morningstar, long-only global bond funds lost 0.4% in 2008 in euro terms, then reversed in 2009 to post an 11.8% gain on the rebound, before normalising somewhat to 7.1% last year – a rollercoaster ride more familiar to equity investors.

Many credit fund investors might long for greater stability; for example, in a long/short strategy. One seeking to generate absolute returns on less volatility is the strategy underlying the Brevan Howard Credit Catalysts fund, listed on the London Stock Exchange. The investment firm floated in mid-December 2010 with US dollar and sterling share classes.

It feeds into the $1.8bn Brevan Howard Credit ­Catalysts Master Fund (BHCC), a Cayman Islands-domiciled long/short, fundamentally driven bottom-up credit fund investment, managed by DW Investment Management LP (DWIM) in New York. It seeks to generate high absolute returns through directional and relative value catalyst-driven trading, and across corporate and asset-backed credit markets. It is one of three listed funds for Brevan Howard, alongside BH Macro and BH Global, which hold $3.1bn in aggregate.

Market dominance

Credit Catalysts sits within the listed single hedge fund sector, which has grown to hold £2.6bn in assets across 15 share classes in seven funds.
BH Macro dominates the sector in terms of assets with £1.2bn, according to RBS’s investment funds team, but other notable constituents include the £402m Third Point Offshore fund and the £614m Boussard & Gavaudan fund, listed in London and on Euronext.

BH Credit’s US dollar class made 4.31% this year to 31 March, according to the company. Over the same period, its dollar shares rose by 2.97%.

David Warren, chief executive of DWIM – a boutique that spun out of Brevan Howard – has made credit ­investments for almost 25 years. He is best known for ­running credit investments separately for Brevan’s $24.7bn unlisted Brevan Howard Master Fund, one of Europe’s largest hedge funds.

Warren joined Brevan, Europe’s largest hedge fund manager, as head of credit trading in January 2008 to build a credit team. This group spun out of Brevan 18 months later. The partners at this firm have worked together since 2001.
Warren himself has 16 years’ experience building and managing mortgage-backed securities trading teams at three companies, including Brevan, and eight years building and running corporate credit trading teams.

He has created, analysed and traded mortgage- and asset-backed securities since 1987, and was involved in the first commercial mortgage-backed securities transactions. It is understood that, harnessing such experience, the strategy DWIM ran was Brevan’s best performing underlying hedge fund in 2010, returning 14.5% net.

Documents released with the intention to float BH Credit revealed that DWIM made 44% from May 2008 to August 2010. Over the same period, the Barclays Capital Government/Credit Bond index made 19%.One investor in DWIM’s strategy says it made money in October 2008, at the sharp end of the crunch.

It has not been immune to falls, however. It declined a modest 0.8% in May 2010, when markets dropped about 10% and fell mildly last July when markets jumped. The investor said: “DWIM tries to limit losses by careful security selection, both long and short. For them, it is about asking how bad things could get if the manager gets things wrong, how illiquid things could become, and to trade accordingly.

“Credit investors need to find a manager who can trade credit in a huge, multi-billion dollar market that is not well understood. If you just invested with a bond manager who bought bonds, there is the risk they will do well, and then poorly, trying to make money in different environments.

“DWIM can put on trades, some bullish, some bearish for the economy, even in years such as 2006 or 2009. Lots of companies filed for bankruptcy, but there were still ways to make money. DWIM focuses on catalysts, which can take three to 12 months on trades.”

Nagi Kawkabani, senior trader at Brevan Howard, says: “The team’s strategy as applied to BHCC since June 2009 has acted as a diversifier to other credit strategies. “The DWIM credit team has generated consistently positive returns quarter on quarter since April 2008 across a wide range of market conditions.

“They made money in 2008 and a lot in 2009. Suffering a maximum drawdown through the entire three-year period of 2%, and doing it while being both long and short, is attractive. Certain other managers had phenomenal returns in 2008, but only by being short everything. Our net exposure to markets was around zero.

“Typically, many credit strategies tend to be deep value, which implies being short liquidity, or carry strategies where you leverage up with a spread. That is not BHCC – it trades while being aware of the illiquidity risks and sizing positions accordingly.” A large position for the fund is 3% of assets – or about $100m – which the manager can comfortably exit if need be within the 90-day redemption cycle for the open-ended BHCC.


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