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Mar 30 2011 | 11:41am ET
Lord Andrew Turnbul, civil servant turned businessman, is the chairman of BH Global, a listed fund of funds dedicated to investing in a single manager—the $32 billion European hedge fund giant Brevan Howard. Turnbull spoke with FINalternatives’ Senior Reporter Mary Campbell recently about the structure of BH Global, the fund’s history and how it helps investors benefit from Brevan Howard’s investment savvy without them having to invest $20 million.
Can you tell me something about your own background?
I was a lifetime civil servant and spent much of my time in the Treasury. I was Permanent Secretary of the Treasury from 1998 to 2002 and then I became the Cabinet Secretary from 2002 to 2005. In the last five years I’ve been retired from the Civil Service and I have pursued a commercial career, so I am a director of Prudential Insurance, The British Land Plc and chairman of BH Global.
Could you tell me what BH Global is and its relation to the Brevan Howard Group?
Brevan Howard is a collection of hedge funds managed by the Brevan Howard Group. In total, they have assets under management of $32 billion and the largest of these is the Brevan Howard Master Fund, which is a macro fund dealing mainly in government debt and foreign exchange, much of that in dollars.
In 2007, a feeder fund was set up as an investment company, so people could subscribe to shares in an investment company registered in Guernsey called BH Macro. BH Macro’s strategy is to invest all the money it has, except for about 2% it keeps in cash, into the BH Master Fund.
Then in the spring of 2008, they started planning BH Global, a kind of younger sister to BH Macro. It has different characteristics in that it invests not just in Brevan Howard’s Master Fund, but in a selection of BH funds. It was launched in June 2008 and at that stage it was invested in five funds, with 40% going into the BH Master Fund and the rest distributed between an emerging markets fund, an Asia fund, an equity strategies fund and a strategic opportunities fund, which was quite similar in what it did to the Master Fund.
So you may even say that this is a fund of funds. A number of other organizations select a variety of hedge funds and invest in a selection of them, the disadvantage to that is that investors end up paying two levels of fees but in BH Global’s case, only one level of performance fees is paid. And if you spread the investment over five funds, what you find is that at any one time, two of them might be doing really well and two of them might be doing okay and one might not be doing so well. Six months later, their positions could have changed. You’re always hoping that the ones that are lagging will be offset by the ones that are prospering. So you get a diversification and of course the investment committee, which is inside Brevan Howard, is always trying to choose the balance of these funds to get the best advantage.
Has BH Global added to the funds it invests in since its inception?
We have invested in three more funds. One is called Credit Catalysts, which invests in credit instruments, mainly distressed U.S. debt and mortgage-backed securities and so on. That came in November 2009, and then very recently two others—one called Commodities and one called Systematic Trading—have been introduced but haven’t been in the fund long enough to have any impact. There are two variables for performance, one is how well each of these funds does and secondly how you can vary the balance between them—so the equity share started at about 10, but has now drifted down to about 5, whereas the Credit Catalyst started at about 5 and is now up to 12.
Last October the BH Global faced (and survived) a discontinuation vote by shareholders. Can you tell me something about this?
The history is BH Global’s IPO was $1 billion in June of ’08, and for about four months shares were doing very nicely, trading at a small premium, but then we had the events of September/October 2008: the crash. Over this time, the net asset value of BH didn’t dip down very much but the share price did and in phases: the first was a wave of panic after Lehman’s collapse and the second, another wave of panic after the Madoff affair. Then gradually, beginning in June of ’09, the share price began to recover.
According to the terms of the company’s prospectus, if the discount over a 12-month period is more than 10% it triggers a vote and the shareholders can decide whether they want to continue the company or whether to wind it up. So by the time we got to the spring of ’09, although the discount by then had narrowed and was then below 10%, the average over that period was greater than 10% and we had a continuation vote. It was overwhelmingly passed because I think people could see that the discount was a reflection of the market uncertainty and that that wave of uncertainty was largely in the past.
We then changed the timing of these votes, so that now we take a calendar year, and if in the calendar year the discount is more than 10%, then we have a discontinuation vote. In the calendar year just finished, the discount varied—it was sometimes as much as 8% and sometimes as little as 1%—so we have no obligation to hold a discontinuation vote in 2011 and this time next year we will assess what the position is and see whether we are required to hold another one.
Is the discontinuation vote rule typical for a listed investment company like BH Global?
Yes, very common—almost universal. I think it’s a standard feature. Sometimes the figure might be defined slightly differently—either the size of discount or how long it has existed— but the idea of discontinuation votes is quite widespread It’s not uncommon for investment companies to trade at a discount to net asset value—the issue would be why it would ever trade at a premium, because if you’re at a premium you’re saying, ‘I’m going to pay more than they’re actually telling me it’s worth.’ So, that’s where we are now. We have a net asset value up just under 20% from the IPO and our share price is up about 9% from the IPO, which makes our discount somewhere around 8-9%.
How would you characterize BH Global?
It’s an investment company that invests in hedge funds. Investment companies can invest in all sorts of assets. BH Global is characterized by two features: one, it invests in a hedge fund; and two, it’s what is called a single-manager hedge fund; in other words, we invest in different assets of a single manager, which is Brevan Howard.
Brevan Howard’s responsibility is twofold: first, they actually do the trading, so the choices as to what trades to undertake are theirs, and second, their investment committee takes the decision as to the distribution between what are now eight funds, as to whether its 40-10-10-10, or something different. And our responsibility, as directors of the investment company, is to see that they abide by the terms of the prospectus in the kind of things they invest in; that they provide the information they’ve promised; and ultimately if performance is poor and a discount develops, then we provide this opportunity for people to wind the thing up.
Could we talk about the advantage of this type of investment to the investor? Is it correct to say BH Macro and BH Global give investors who can’t afford the $20 million minimum necessary to invest in the Brevan Howard Master Fund a chance to invest with Brevan Howard?
Yes, absolutely. If you were mega-rich, you’d probably go straight into the hedge fund itself. If, on the other hand, you want to invest either $10,000 or $100,000, a listed hedge fund such as BH Global or BH Macro will give you access to Brevan Howard managed assets. BH Global is aimed at private wealth rather than either institutional wealth or mega-wealth. Also, you can always get out by selling the share.
Now, say you managed the endowment of a major American university, for example, your mandate may require you to invest only in listed securities. So we enable them to invest in the hedge fund without having to allocate very large sums or face the illiquidity which could arise from investing directly.
BH Global has $900 million in AUM, and obviously Brevan Howard is much, much bigger. These days, when you often hear fund of funds managers talking about looking for smaller, more nimble managers, do you think your size is an advantage?
Well, at this level, I don’t think size is a disadvantage. After all, our investment is divided up into smaller units anyway. And the way in which Brevan Howard operates, it has 70, 80 or 90 traders who operate independently (with one exception, which is risk-management, for their positions are reported to the group; otherwise they take their own decisions). So because they’re big doesn’t mean the bets placed on each trade are big—there are lots and lots of individuals decisions. It isn’t as though there’s one man, you know, like George Soros, saying ‘We’re going to bet against the Israeli shekel’ or something.
The Brevan Howard pattern of trade is completely different from that, in that it’s a series of discrete trades which are constructed to come out with a win but also with a trigger point at which you would close the position out and say it wasn’t working. So, size shouldn’t be an issue: you have more traders so it’s not as though a small number of traders are getting bigger and bigger and bigger.