Double our fees or we quit: Brevan Howard’s ultimatum to BH Global & Macro boards

Hedge fund manager Brevan Howard has stunned investors in BH Global (BHGG) and BH Macro (BHMG) demanding a doubling in its annual management charges and a return to performance fees, threatening to resign from both investment companies if its request is not quickly met.

Going against a long trend of falling investment company charges, Brevan Howard Capital Management (BHCM) has told the boards of both Guernsey-based, but London-listed funds that its annual fee should be restored to the level before it was broadly halved by cuts in 2016 and 2017.

The boards of both closed-end funds, which offer unique access to Brevan Howard’s currency and bond traders, previously demanded the fund manager lower its fees after their shares performed in a lacklustre fashion for several years.

However, 2020 saw Brevan Howard’s traders spring to life in the bear market crash unleashed by coronavirus. The Cayman Islands Master Fund behind each investment company made money in the February and March rout last year and held on to the gains to deliver a 27% total return to Global shareholders and 35% to Macro investors.

After such a strong performance, Brevan Howard bosses clearly think the boot is on the other foot, telling the board of both funds that since launch their shares have achieved good absolute returns but with less volatility than mainstream stock markets, ie, they have done what hedge funds are designed to do.

The fund manager says the 96.2% total return of the £412m Global fund’s sterling share class from 2008 to the end of 2020 equated to an annualised rate of return of 5.5%, with annualised volatility of 5.9%. By contrast, the MSCI World index provided a higher average annual return of 6.7%, but with much higher volatility of 16.8%. The UK’s FTSE 100 did worse, providing a smaller annualised return of 4.2% on high annual volatility of 14.3%.

‘Noting the exceptional performance of the Master Fund, the substantial ongoing investment and the increasingly competitive environment, we have concluded that the management fee concessions agreed in 2016 and 2017 no longer support the future success of the company.

‘We therefore propose that these concessions be withdrawn and the fixed component of the fee paid to the amnager is adjusted back to its prior level of 2% per annum, the fee level that was paid by the company from 2014,’ Brevan Howard states.

Similarly, the £550m Macro fund had since 2007 delivered an annualised 9.1% return or total return of 233.7%, with annualised volatility of 8.5%, it said, demanding a return to a 2% base fee and the lengthening of its notice period from three months to one year.

The fund manager requested the funds hold extraordinary general meetings to approve its new terms. It warned if a notice and circular for the EGMs were not published by 17 February, it would serve notice and resign as their fund manager.

In a brief statement, the funds boards said they would consider the matter and respond in due course.

Christopher Brown, investment companies analyst at JPMorgan Cazenove, downgraded both funds, moving BHGG from ‘overweight’ to ‘neutral’ and BHMG from ‘neutral’ to ‘underweight’, saying shareholders were ‘caught between a rock and a hard place’.

He said Brevan Howard was in a strong position as there were few alternative fund managers offering its experience. If the fund manager quit, it was likely the investment companies would close. If it stayed and the charges rose, investors’ returns would inevitably be lower.

‘We can understand why BHCM is arguing for higher fees, but the effect of doing so is likely to result in friction between the board, shareholders and managers if not settled amicably,’ Brown said.

Numis Securities cautioned there were risks for Brevan Howard, whose founder Alan Howard regularly featured in the Sunday Times list of Britain’s richest hedge fund managers a few years ago, before a downturn in the business that last year’s success had partly reversed.

‘Brevan Howard’s proposal to go back to the full 2%/20% fee structure may risk shooting itself in the foot as investors are becoming increasingly fee sensitive and rationing exposure to high-cost vehicles, even when performance is strong,’ said analyst Andrew Rees.

BH Macro shares dropped 70p or 1.9% to 36 pounds and BH Global eased 5p or 0.2% to 20.14.



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