Alan Howard’s comeback to profitability is a welcome story for those investors in the flagship Brevan Howard Master Fund.
Alan Howard’s fund had been underperforming for four consecutive years, generating low single-digit returns and at one point was even losing money. Alan Howard was not immune to the dreaded redemptions with investors yanking nearly three-quarters of the firm’s assets, which stood at about $12 billion by the end of 2016. Two years later the Brevan Howard Master Fund asset under management shrunk again to a little more than half that at $6.3 billion in 2018.
“Alan Howard’s fund had been underperforming for four consecutive years, generating low single-digit returns and at one point was even losing money”
Alan Howard, the alpha macro trader looked like he was going to be assigned to the top-heavy shelf of once-legendary traders who played the markets past their prime, ending their turbulent careers with a cry. Watch a hedge fund manager cry me a river for his investors when he was “hit by a rogue wave” and lost a lot of money.
Alan Howard’s comeback did not entail a crying performance for his investors
Instead, the legendary macro trader reassessed how to restart his money-making machine fund.
Alan Howard’s comeback was driven by a competitive drive and self-confidence to excel and be the best. Alan Howard wanted to walk in the land of the macro giants with Ray Dalio, George Soros, and Stanley Druckenmiller. “I think every top trader wants to be viewed as an Olympic gold medallist” said Alan Howard. For the best of the best, it is not all about the money it is about winning and the thrill of the game.
“I think every top trader wants to be viewed as an Olympic gold medallist”
Alan Howard like all macro traders makes long-term bets on economic changes and the policy responses that accompany them. Alan Howard favors option-style trades with big payoffs if a predicted event occurs, for example, a change in interest rates.
Alan Howard’s comeback involved his firm embarking on an ambitious turnaround plan which required slashing costs, emboldening its most talented risk-takers, and even changing some fee structures.
Alan Howard refocused capital and energy on where he considered being the firm’s core strength
Attracting top talent to the flagship Brevan Howard Master Fund made up a big part of Alan Howard’s comeback to profitability. Alan Howard was able to woe superstar traders with impressive track records. Moreover, Alan Howard opted not to micromanage this elite team of traders, instead, he decided to cut them loose give them greater autonomy, more responsibilities, pay and in some cases even their own funds to manage.
“The real challenge is keeping the trading talent” – Nagi Kawkabani
Alan Howard’s team of elite traders had skin in the game, they were incentivized when they made winning traders and quickly dropped if they kept making losses
“The real challenge is keeping the trading talent” said Nagi Kawkabani, a co-founder of Alan Howard who once served as co-CEO, in a telephone interview. “For some, we did that by allowing them to launch their own funds”.
Alan Howard’s comeback to profitability has not been without controversy
In the first quarter of 2017, Alan Howard’s firm created a new general macro fund called the Brevan Howard AS Macro Master Fund. Alfredo Saitta, a veteran trader of JPMorgan and Citigroup managed the fund. Alfredo Saitta is a well-known figure in the high stakes world of trading in global bond and currency markets.
Moreover, the star trader is under investigation by UK’s Serious Fraud Office as a co-conspirator in the Euribor trial in what prosecutors call a scheme to manipulate interest rates.
Euribor is a benchmark that helps set interest rates on trillions of dollars’ worth of financial products, such as mortgages and corporate loans. The benchmark was an average of figures submitted by a panel of banks based on how much it costs European banks to borrow from each other.
“His (Alan Howard’s) strategy appears to need volatility. It needs movement in currencies and rates” – Dick Pfister, AlphaCore
A range of new fee structures also contributed to Alan Howard’s comeback
For example, instead of a typical 2 percent management fee and a 20 percent share of profits above a high-water mark, the AH Master Fund charges 0.75 percent for management and takes 30 percent of profits. Other fund management fees range from 0.75 to 2 percent, and the take of profits runs from 20 to 30 percent.
“I think the sophisticated investors are more inclined to like that” says Dick Pfister, founder of AlphaCore Capital, a wealth management firm based in La Jolla, California, that invests in Alan Howard funds. “It shows their confidence in their own strategies”.
Aggressive cost cutting was also part of Alan Howard’s comeback story
Beginning in 2014 the firm shelved half a dozen of what is considered to be noncore hedge funds that invested in markets like long-short equities, commodities, and emerging markets. It fired strategists and support staff. The firm’s headcount has fallen from 60 to 40. The firm had cut back on gym and kitchen facilities and reduced its floor space in its sleek Marylebone office, in a building that was once the site of the headquarters for Marks & Spencer Group, the famous UK retailer.
Alan Howard’s comeback was most noted in 2018 where the Brevan Howard AH Master Fund rose 30 percent.
“His strategy appears to need volatility. It needs movement in currencies and rates” said AlphaCore’s Pfister. “We’ve always believed that when things begin to move, he was going to come back”.
But the first quarter of 2019 has seen Alan Howard’s comeback reversed with his fund falling 8.5 percent in the first two months of 2019.