Quant Macro Investing

Risk Taking Disciplined

FT: Hedge fund manager seeks to stay top of tree

Hedge fund manager seeks to stay top of tree

By Sam Jones

Published: January 13 2010

Alan Howard’s first job was, fittingly, to look after the keys to the London Stock Exchange.

He was there – straight out of London’s Imperial College – on a three-week work experience in the summer of 1986, in the weeks running up to the so-called “Big Bang” in the City of London – the convulsive reforms that, among other things, helped to pave the way for the growth in London’s hedge fund industry.

A quarter of a century on, Mr Howard is taking full advantage of those changes. Brevan Howard, the publicity shy hedge fund manager that he founded in 2002 with colleagues from Credit Suisse, has been one of the industry’s strongest performers over the past two years. It now has about $27bn (£18.1bn) in assets under management, making it the largest hedge fund in Europe and among the top five in the world.

“He’s one of the best traders in the world,” said one institutional investor. “Everyone has heard of Paul Tudor Jones and George Soros, but Alan has already outdone them.”

The investment strategy that Brevan deploys – global macro – is based on trading the bond and currency markets. It is widely tipped for a successful 2010, because of huge shifts anticipated in global trade and economic balances. Demand has been so strong that the firm has already shut its doors to new money from clients.

pop-up: Brevan Howard FundLike most large funds, Brevan Howard suffered huge redemptions – about $9bn – from investors after the collapse of Lehman Brothers, but unlike other large peers, it has taken Brevan a remarkably short time to return, and surpass, its previous peak.

With institutional investors now looking to increase their asset allocations to the hedge fund industry, strong performances such as that reported by Brevan Howard are in short supply.

In 2008, the master fund made 20.4 per cent, in a year when the average hedge fund lost close to the same amount. In 2009, according to performance numbers sent to clients earlier this month, the fund returned more than 18 per cent. The firm has not yet had a down year.

Brevan Howard also has two listed versions of its funds on the London Stock Exchange – a point of pride for the firm. A plaque in Brevan Howard’s lobby commemorates the launch of the vehicles, which aim to track performance of the firm’s main offshore funds.

Mr Howard remains at the centre of the Brevan funds’ trading. He still sits in the middle of the trading floor – housed in the former headquarters of Marks and Spencer on Baker Street.

According to people familiar with the situation he trades as much as a quarter of the funds’ assets himself. Indeed, close to three-quarters of all trading – billions of dollars worth – is done by a small team of fewer than 10 traders.

Although the instruments traded, which range from government bonds through to options contracts and derivatives, can be complex, the outlook, according to people invested with the firm, is qualitative. “Alan is an extremely intuitive trader,” says one large fund of funds manager. “They don’t just know about the bond market but have a proper feel for it.”

A lot of the success of the firm, however, is also down to risk management as much as pure returns.

Like many peers, the funds run to strict risk limits. Traders are given mandates set by the firm’s risk management committee that limit what they can trade. Losses are closely monitored and quickly curtailed. The more a trader loses, the less money he or she is given to manage by Aron Landy, the chief risk officer. Even Mr Howard is subject to the same strictures.

The process pays off. Brevan Howard began to de-risk its books aggressively in 2007, well ahead of many other hedge funds and financial institutions. The collapse of two Bear Stearns-backed funds that year prompted a dramatic revision of Brevan Howard’s outlook.

The firm significantly decreased leverage, moving as much as 70 per cent of its book into highly-liquid cash-like securities as it became apparent that markets were beginning to seize.

In addition, Brevan Howard also reviewed its counterparty risks, cutting its exposure to investment banks it saw as risky. The firm has all of its cash assets in custodial accounts at BNP Paribas, separate to the prime brokers it uses.

The greatest challenge the firm now faces is how to stay on top.

The hedge fund industry is fickle and retaining talent is a constant challenge.

For example, Jean-Philippe Blochet, a founding partner and the B in Brevan, left the firm in autumn 2009 to join rival Moore Capital. The key question for Brevan Howard now is how it manages to continue beyond the careers of its founders.

January 14, 2010 - Posted by | Hedge Funds

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