The founder of the £24 billion hedge fund group Brevan Howard has accepted that 2013 was not a vintage year for its strategies, while recommitting to the same themes.
Last year the firm’s flagship BH Macro fund returned 2.6%, which Alan Howard described as ‘a somewhat disappointing performance given the strong gains made in the first four months of the year’.
In his annual letter to investors, Howard laid the blame for the muted results on interest rate strategies, driven by losses in the first half of the year on directional euro-rate trading.
Brevan Howard’s case for the investment was that disinflationary pressures in Europe would compel the European Central Bank (ECB) to cut rates, so Howard said that the firm had gone ‘aggressively long European interest rates’.
However, short-term interest rates spiked in January before resuming their downward path through to early May.
For the year ahead, Howard maintained that the same trade ‘seems to offer potential’.
He said: ‘The ECB was under little pressure to take action in 2013 because of a gradual improvement in Eurozone economic sentiment and data. We believe that part of this improvement was due to a reduction of fiscal drag for most European governments as 2013 marked a pause in Eurozone governments’ attempts to pursue additional austerity or to address budget deficits.
'However, as the fundamental fiscal imbalances have not yet been resolved, it is likely that the fiscal stance will become more restrictive in 2014, which may lead prospects for growth to deteriorate in the latter part of the year. Should the current disinflationary pressures in Europe persist, the ECB will have to take more aggressive monetary action.’
Howard also confirmed that he would stick with two of last year’s winning themes in 2014: long Japan, and long the US dollar.
‘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. What is possibly different this time is that prime minister Abe has a clear mandate to pursue his policies.’
Turning to the US, he added that he anticipated a sustained period of unwinding as QE is reduced. ‘Now that the Fed has finally started to exit its extraordinary asset purchase programme in the US, we would expect the opportunity set to trade both US rates and the US dollar to markedly improve.’
He characterised his approach to 2014 as ‘pressing winning themes’, noting that doing so had delivered annualised returns of around 20% for three consecutive years between 2007, 2008 and 2009. ‘Going forward, we will continue to press winners, but recognise that we must also focus on better protecting gains.’
He concluded: ‘We are all fully aware that 2013 was a disappointing year in terms of returns and we are determined to deliver a more satisfactory outcome for 2014.’