UK Edition
If hedge funds are meant to be cowering following the Reddit traders’ uprising against Wall Street, no one at Brevan Howard got the memo.
The manager of BH Global, the investment trust Questor tipped last year, has handed the board an extraordinary ultimatum, threatening to quit unless its fees are doubled.
Should Brevan Howard succeed in its demand, the trust’s management fee would jump from 1pc to 2pc. That’s on top of an existing performance fee entitling the hedge fund manager to 20pc of any rise in the trust’s net asset value.
There are no signs of Brevan Howard backing down. Last week the board reported the fund group had been “unwilling to consider any reasonable alternative” to its terms, as it announced an extraordinary general meeting to vote on the proposal.
The move represents an attempt by Brevan Howard to turn back the clock. Not just back to 2017, when its fee had stood at 2pc before the board succeeded in halving the charge, but to a time when a “two-and-twenty” charging structure was the norm for all hedge funds.
That is no longer the case, however. Of the hedge fund strategies which, like BH Global, are accessible to British investors through investment trusts, none charge as much as 2pc for management, though 20pc performance fees are still prevalent.
So what makes Brevan Howard think it can buck this trend? As the fund manager puts it in its letter to the board, “exceptional performance”.
The fund group is attempting to renegotiate its fees after a renaissance in its investment returns. The shares are up 27pc over the last 12 months, and the NAV by a similar amount. While that is ahead of the 18pc from the MSCI World, a barometer for the global stock market, Brevan Howard’s real achievement was in delivering returns at the peak of the coronavirus crisis, when stock markets were tumbling.
It was that, coupled with the fund manager’s similar record in the financial crisis, that convinced Questor to buy.
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A trust that goes up when the market goes down, which Brevan Howard has achieved by exploiting trends in foreign exchange, interest rates and commodities, was at the height of its appeal in the middle of March last year, and the shares’ then discount of 4.7pc added to the reasons to buy.
Since then, the shares are up 16pc, though this column’s paper gains had reached 22pc before Brevan Howard’s letter to the board landed. The fund manager’s threat has sent the shares, which had been trading at a premium to NAV, back to a 4.3pc discount.
That discount reflects the fact that neither of the two alternatives investors face look particularly palatable. Should Brevan Howard walk, investors will be losing their access to an investor which has proved adept at navigating stock market crises. Or, as is more likely, the fund manager succeeds in its demand and investors will be paying more on top of already high charges.
BH Global last quoted its ongoing charge, including the impact of the performance fee, at 2.5pc for 2019 in its annual report. But that was after a year when the NAV, including the impact of these fees, was up 4.8pc. In 2020, the NAV rose 21.8pc.
BH Global does not quote an ongoing charge in its 2020 half-year report, but BH Macro, another investment trust run by the managers with a similar charging structure, does. That shows a 5.7pc charge for the period, including a performance fee of 4.6pc.
The £11.6m in performance fees disclosed in BH Global’s interim statement, or 3.2pc of assets that closed the period at £368m, is not far behind.
Investors are already paying enough for Brevan Howard’s management and some shareholders are likely to baulk at higher costs. Anticipating that, the board is seeking to allow them an exit.
Further details could come in a shareholder circular expected next week. If it resembles the 98pc of NAV being offered to shareholders of BH Macro, which is being subjected to the same demands from Brevan Howard, it would represent a better deal than selling shares in the market now.
Questor recommends investors sit tight, just for now. A better opportunity to exit could be just around the corner.
Questor says: hold
Ticker: BHGG
Share price: £19.15
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