BH Macro has overcome the second biggest drawdown in its history to end the year in positive territory.
Giving a candid review of the listed hedge fund's performance, Alan Howard, Brevan Howard's founder, revealed that on the back of simultaneous losses across its strategies BH Macro has seen one of the heaviest drawdowns since its inception in 2007.
'The macro picture remained highly stressed throughout 2012, with concerns about peripheral Europe in the first half and the US fiscal cliff in the second half creating significant potential event risks,' Howard said.
'Against this backdrop of poor fundamentals and extraordinary monetary accommodation, markets reacted primarily to statements from policymakers rather than economic data. This new dynamic made the structuring of portfolios more difficult than usual,' he added.
It was the performance of BH Macro's risk-off trades that stood out over the stretch reviewed, and Howard acknowledged this had been 'significantly worse' during times of stress, denting returns for the year as a whole.
The fund entered 2012 with a broad balance between risk on and risk off, staying short rates, long steepners credit - reflecting a risk on view - and expressing risk off through long volatility, money market basis wideners and short euro exposures.
The strategy proved reasonably successful in 2012's first quarter as losses in FX trading were made up for by gains in rates and credit trading.
There was a significant shift towards risk off in the second quarter, though, as investors took fright at the rising stress levels in Europe and the slowdown in growth in China.
'During this period of turmoil the fund suffered its second largest drawdown since inception as several strategies incurred losses simultaneously,' Howard said, explaining that global interest rates had rallied, the European interest rate curve flattened, while credit, peripheral European debt, equity and commodity markets all sold off.
It became clear in the third quarter that central bankers would react to the growing sense of unease, prompting BH Macro to go long European rates and optionality on risk asset, essentially positioning for global monetary accommodation.
These trades were quickly rewarded with a 7.8% gain in net asset value (NAV) as the European Central Bank cut rates and pledged to do whatever it took to fix the eurozone, while America's Federal Reserve launched its third round of easing.
By the year-end, BH Macro finished 3.86% up. Howard said he was pleased these returns had come from traders - including its 38 new recruits - rather than from one or two large books attracted to the fund.
Looking forward, Howard said the tail risks that had 'haunted' investors for the last five years appeared to have faded, although he believes they have not totally disappeared.
'A naive faith in policymakers' ability to provide a perpetual put may yet prove to be a serious error, and with interest rates stuck at zero, investors' ability to easily earn back losses remains severely impaired,' Howard cautioned.
With this in mind, he said Brevan Howard should maintain its risk management discipline and stay mindful of the potential for renewed stress, though feels more optimistic about the macro trading outlook than he has for some time.