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For similar reasons, I’ve got these two in my portfolio.
Flow Traders. An ETF market maker. Made a fortune from the April 2020 panic, issued an enormous dividend. Since then, the share price has collapsed, but worth buying if you see a disaster coming that no-one else does. It prints money in a panic. Had its toes into crypto a bit too.
RIT capital. Really disappointed with performance in the last year, but now at a huge discount, similar story of suspicions about hedge fund holdings, and surely must recover. Around 25% of my ISA.
Might diversify into BH or Pershing Sq, useful tips and a solid reason to invest.
Brevan is a quality act. It has excellent infrastructure. It pays well but never pays the most. Alan taking a back seat is not hugely relevant. That process has been ongoing for years and reduces key man risk. I have no reason to believe that long-term they will not continue to produce a risk-return profile like that observed over the last two decades.
2023 was never likely to be an great year for rates macro. A transition between the hikes of 2021/22 but not early enough for a new cutting cycle. Many macro funds got caught out by the massive moves in US front end rates in Mar 23. Some daily moves were 20x normal. Rates macro thrives on volatility but often it needs to be “expected volatility” i.e. volatility that stems from cyclical changes in monetary policy, inflation etc. The “unexpected volatility” of SVB triggered a huge liquidity air-pocket as the market feared emergency Fed cuts.
Nonetheless, Brevan’s performance has been terrible. A return of -5% shouldn’t happen. SVB wasn’t an unknown scenario. My interpretation is their too rapid increase in AUM (from sub $3bn in 2018 to over $30bn now) has caused imbalances in the portfolio of traders.
The problem here is there needs to be a balance struck between the directional, large scale, PMs of the Macro strategy and the smaller, but more numerous PMs on the Alpha strategy. It’s the macro strategy that is down. The Alpha PMs tend to “chip” most of the time, while it’s the Macro PMs that score home runs. However, when the SHTF, it’s the positive convexity/gamma of the Alpha PMs that hedges the losses on the Macro book. The difficulty it that while it’s easy to scale the macro book, the alpha book is inherently not scalable. Management can allocate as much AUM to the Alpha fund as they like. It just won’t get used.
To get around this, Brevan has been hiring. Problem is so is everyone else. The market was incredibly frothy for Alpha type PMs. Worse still, PMs now have 6-18 month non-compete agreements. So even if the PM signs, there is a long lag time to them turning up.
@TI: wishing that my own report/analysis /advice/client note writing was as clear, insightful, useful and engaging as yours. Very grateful for another superb piece.
@KISS #1: interesting ideas. I’ll be looking into those. @Algernond also kindly posted on a recent thread about Montlake Dunn WMA GBP trend following fund (targeted absolute return sector).
@ZX #2: many thanks for the as always fascinating hedge fund insider’s / PM’s perspective. Appreciating here that the EMH probably is ultimately BS but that, whilst all models are wrong some are useful: Why are anomalies traded by Macro likely to remain both persistent and exploitable at scale? I’m worried it could substantial dry up if, and when, markets continue their current trend towards ever greater efficiency. (Same fear I have for momentum etc).
Also bit worried stop losses at BH don’t seem to have kicked in properly this year during turmoil over rate regime transition and SVB. Do you think their positions just gapped out and, if so, then what are your views on the implications, if any, for the resilience and efficacy of SL based risk management in macro funds?
[BTW: on non-compete, why doesn’t Fund B, whom the trader or PM is moving to, not just pay off Fund A to let trader leave Fund A to start the new job immediately? Surely it would suit everyone’s interests?]
Already brought teeny dollop of BHMG for GIA following the comments thread on the PSH Mogul article. Question now is optimal position sizing for goals and risk tolerance, bearing in mind alternatives. There’s no reason for those even slightly into active investment or diversifiers not to at least very seriously think about BHMG. But is it sufficiently compelling, amongst whole possibility landscape, to use as a major portfolio building block to allocate 5-20% to? Maybe. Sharpe’s ~1 (equity trackers weigh in at 0.3-0.4) with somewhat equity like returns over 2 decades. It’s a very promising candidate. On the other hand, it doesn’t have long term significantly above equity returns, as far as can tell.
Thank you for the great and timely article.
I hold 5% in BHMG. Bought in too early this year, but have averaged down recently on the discount widening out. I suspect the wealth manager overhang you cite is indeed a big part of the issue for poor share price performance.
This year I’ve been trimming my exposure to “wealth preservation” trusts like CGT/RICA/RCP. Part of the reason for owning Ruffer has been its illiquid strategies which have paid out well in times of market stress. However, we can now pick up similar exposure directly at a discount via BHMG, whilst owning many of the cornerstone assets in these trusts with greater tax efficiency (ie, owning gilts and linkers directly) and cutting out the management fees. I’m also holding c.15% in infrastructure in ISAs which in my view offers some of the best risk adjusted returns in the market.
Over the medium term, I’m targeting 7.5% in “diversifiers” and considering adding Winton Trend…any other ideas?
@TLI. I’ve been invested since 2007. Current YTD NAV drawdown of 5% is the worst I’ve seen for Brevan since they launched in 2002. While the move in Mar was exceptional, I am concerned that they got caught out. It’s out of character for them. Plus, they have been struggling all year. In return terms, they are down everywhere: Rates (-1.8%), FX (-1.45%), Commodities (-0.5%), Equities (-1.2%). Other funds have lost and then rebounded. BH seems to be stuck in limbo. It points to having too much capital and not enough risk. Alan says they won’t go above $50bn. Sort of feel they are already too big for a rates-centric macro fund.
Their core has always been FRA and swap trading. Exactly what I do. Against my expectations (I expected to be obsolete a decade ago), the rise of trackers, momentum algos etc has caused efficiency to deteriorate and segmentation to increase. The reason for that deterioration though is really an imbalance in liquidity. The buyside is too big, the sell-side market makers too small. So easier to make money in small, ever harder to scale that without getting yourself into a mess. I don’t think TI perhaps understands how liquidity has collapsed since 2008 in rates markets. Unintended consequences of bad regulation (Dodd-Frank mainly).
Long-term, Brevan’s returns are solid, but their Sharpe is unexceptional at just over 1. To me, their primary selling point is their negative correlation with conventional assets, most specifically the S&P. They 12-month rolling correlation has averaged around -40% over the last 15 years or so. You don’t get many funds that do that while still generating close to 10%/annum.
Another great read, thanks TI!
I find those situations where someone is a forced seller in a low liquidity stock is an under reported impact on short term prices. As a retail investor, you never really know for sure what the other market participants are doing, but it sometimes smells like some kind of game is afoot. I find it best to watch from the side lines most of the time.
Many thanks @ZX #5. At this sort of fund size, unexpected illiquidity could be the Achilles heel. I hadn’t appreciated by how much the IR derivative markets had become less liquid under stress, although I had been aware of the argument after the March 2020 COVID crash in the bond markets (tanking when they should have gone up in a flight to safety) that the mechanisms Dodd-Frank mandated for margin requirements had drained the liquidity away in risk off assets when it was most needed, thereby systematically increasing the very risks which D-F sought to avoid. Another example perhaps of today’s solutions becoming tomorrow’s problems.
When an outsider like me hears about the fantastical sounding notional value of the derivatives markets worldwide it is easy to forget that the actual amounts of traded capital are far smaller, and the markets themselves can become much shallower and much more quickly, than ‘headline’ numbers alone suggest would be credible.
The shares in BHMG should remain pretty liquid though because of the discount / premium pricing aspect of closed end fund permanent share capital. So, when skies are blue and sunny at Brevan, but the equity markets are stormy and dark, it should be possible to rebalance from the former to the latter, leaning into mean reversion, as @TI puts it.
In that way, BH could possibly function a little bit along the lines of long bonds in a portfolio, but without the IR / duration risk.
@London Yank #4: > “…any other ideas?”: BHMG and FLOW (the latter as kindly highlighted by @KISS #1) are the only really different diversifiers that I’ve been able to find on a quick search after @TI’s article on the former.
Trend followers Winston and Montlake Dunn are, to me, more just using different strategies, which may or may not actually diversify. They don’t aim to diversify per se, at least that I’m aware. There’s more than momentum going on in those 2, but they use it, and momentum is obviously very highly correlated (over correlated in some sense) with underlying markets.
Obviously, there’s the usual 4 or 5 broadly defensive multi-asset retail ITs and funds (Troy Trojan (Class X) for funds and CGT, PNL, RICA and LWBD for ITs – but I’m not including RCP here as, to my mind, that’s more a growthy trust with some currency positions).
There’s also the perennially disappointing open ended retail fund absolute return sector. Maybe it should be renamed the absolute flop sector. The dog with the least fleas in that boat looks to me to be VT Argonaut Absolute Return fund.
An honourary mention perhaps due for Hipgnosis Songs Fund Ltd. It should be uncorrelated with equities generally but has got itself into some sticky financing issues ($700 mm revolving credit facility launched) over a massive (maybe over ambitious and poorly timed) royalty stream buying spree to expand its song catalogue from 5k to 65k tunes. That’s led to a chasm like discount to NAV of over 47% opening up as of close on Friday.
If that strikes one as being too risky by half, then worth perhaps reminding that the subject of the very first Moguls article, PSH, has a massive 19% position in Universal Music Group which (as Ackman in a recent interview proudly pointed out) carries almost no debt.
@all — Cheers for the comments and glad the article was of some interest! 🙂 I’ll just offer a few quick replies, as I’m most interested in from hearing from other Mogul members (and I think it will be more useful to others) than me crowding out other views by adding to my own 5,788 words with more down here 😉
@KISS — I also have a fairly regularly shifting position in RIT Capital. Amazed how far the discount has blown out. My read is private markets are into the suck that public equity markers were in this time last year. So perhaps it’ll stop being de-rated for its private holdings in early 2024? Assuming they’re as reasonable as we hope, of course. Be interesting to see how the upcoming big IPOs elsewhere fare (Instacart and ARM) for clues.
@ZXSpectrum48K — Thanks for your extensive thoughts, I was of course hoping you’d add your HF insider perspective here. 🙂 From the combination of your comments, my takeaway of what you’re saying is that the size of BH isn’t an issue when markets are good (it can still eke out its performance from various strategies, albeit with weight of capital sub-optimal) but that when markets become distressed and liquidity is truly crunched, it’s scale is revealed and it’s caught out of position and has to close inelegantly / with losses? Clearly that’s far from ideal if correct, given that like you I want BHMG for times of distress in equity markets. I wonder if it might grow into its scale with experience? (e.g. Learn to get out of positions sooner? Tricky I suppose with black/grey swans). I was aware of the more generally constrained liquidity post the GFC, although I’d hoped growth/time were easing things for the likes of BHMG. I guess the withdrawal of IB prop desks etc is a double-edged sword, in that it removes competition but also liquity? My final fairly uninformed observation is that perhaps there’s a case for BH to step into the market-making role? Perhaps it’s explored/is doing that to some extent already.
@TLI — I don’t really see PSH and BHMG as in the same bucket, except for Ackman’s stylistically confusing and yet intriguing macro hedges, as we’ve discussed before. Besides both being to discount plays, of course. 🙂
@LondonYank — I’m with you… I got a modest position in the BHMG mildly discounted share issue in January which I planned to sell for a quick profit. Got roughly half of it away for an instant 5-10% from memory (maybe 7% gain?) but then decided to keep the other half and that is well underwater. I’ve been adding aggressively (for me, I have a *very* diversified portfolio) to that small position in recent weeks. As for other funds, I’m not someone to come to for domain knowledge on those. Other Moguls may have ideas?
@Markabey — Indeed, though we must remember that the ‘forced’ selling here is somewhat conjecture on my part. Looking forward to learning more perhaps from the AGM in a couple of weeks.
This article is *very* similar.
Makes point that the board have fixed discount to NAV previously… And hints at action near board meeting on 13th.
https://masterinvestor.co.uk/funds-and-investment-trusts/potential-discount-opportunity-at-bh-macro/
@KISS — Haha, similar but about 5,000 words more concise. 😉
I did see it come up in Google Finance as I was finishing up my draft late Wednesday. It reminded me about the upcoming AGM.
Anyone have any idea if the author Nick Sudbury has any form at spotting profitable discount plays? He’s new to me.
I’ve been to the Master Investor show but it tends to be full of micro-cap resource miners in my experience.
@ TLI, thanks for the response. I’m still early in exploring options, but it struck me that Winton seems to have low/negative correlation with major asset classes (which would seem to make sense given they’re trading everything from yen to wheat!)
https://assets.winton.com/cms/PDFs/UCITS/WTFU-Retail/2023-07-WTFU-Retail-Monthly-Report.pdf
Capital Gearing Trust was my largest holding until earlier this year. I think the challenge with all of the “wealth preservers” is they hold such a large share of assets in linkers and bonds now, and in my situation, it’s much more tax efficient to hold the constituents directly given my holding was unsheltered (and as a highest rate taxpayer). I estimated the hurdle for these funds to be c.6% in order to beat low coupon gilts, given the tax drag and management fees.
@TI #8: FWIW prefer BHMG to PSH. Only brought little dollops of each so far, but might increase BHMG to a small portfolio building block whereas not looking to do so for PSH. Very different propositions. Former a wide ranging set of trading strategies under single umbrella with a nice combo of long term annualised returns of nearly 10%, low vol, high Sharpe and potentially low to negative equity correlations. Latter is a special (Ackman-centric) situation which is certainly very interesting, but for me not suitable for a foundational holding.
@KISS #1 & @London Yank #11: re RCP and CGT: after replying to KISS #1 at my #3, I reminded myself that I actually have ~1% of my portfolio in RCP, brought this year at same time as putting a similar proportion into each of PNL and SMT and ~2% into each of CGT and HVPE. Forgotten/ignored the ongoing poor performance of RCP further into 2023 as saw it at time of purchase, along with SMT, as being a long term buy & hold, especially for the large share of unlisted investments (which are now causing the market’s NAV anxieties). HarborVest has own rationale, as wanted a little bit of pure play PE exposure to just more accurately reflect the make up of the markets as a whole, and the discount there seemed an opportunity to get it cheap. However, I’m gutted with poor recent performance of CGT. Along with PNL, these 2 trusts were supposed to be diversifies which could even be used as alternatives to keeping dry powder as cash. Instead of which, supposedly ‘safe’ CGT (appreciate now nothing is safe) is on way to its worst performance since trust founded in 1982, with what will probably be the only second full yearly loss (along with 2009) and suffering its worse draw down from a previous ATH. Peter Spiller’s been a truly outstanding manager over 41 years at the trust, but 2023 demonstrated no multi asset strategy is going to work all the time. Linkers have brought it down this year. Psychologically, I’ve found that paper losses are perhaps 10x harder to bear in the supposedly safe parts of the portfolio (which I had mentally labelled as cash substitutes) than for the growthy stuff, where had expected, and can safely ignore/forget about, the price bouncing about all over the place (and even forget fact that I own it at all).
Re: Winton (apols for the mistyping in my earlier post): Yes, agree it does look more in the BHMG mold than, say, Montlake Dunn.
Re: FLOW: Interested in this. Shame that shares are listed in Euros, so there will be an FX fee. But, as this would be another B&H if buy it, that cost would be a one off (excluding consideration of FX costs on dividends).
@TI. The original BH was based around a small number of big PMs, such as Howard and Rokos (who was the “r” in Brevan). This proved good for the first decade until their size of $30bn coincided with a collapse in volatility. Hence the poors returns mid last decade.
In their newer incarnation, they have tried to move closer to the ‘pod’ model approach that Citadel and Wellington use. A lot more pods should be more scalable, less concentrated. Whilst doing that they want to maintain that long convexity/long volatility angle that their investors want. There is no style drift in objective.
For the management, though, it’s a move from trading the market to trading traders. Increase that pod, cut that pod etc. Reallocate from directional to RV etc. The issue is that process takes time and their recent growth in AUM has been so rapid.
Mar 23 would normally be a good event for BH. Instead they dropped the ball. Extrapolating a single data point against a two decade trend is rather unfair on them but it’s does deserve close attention.
Maybe worth linking back to excellent and rather prescient discussion about BHMG in the three comments from @tom_grlla #14, @London Yank #16 and @ZX #17 on the earlier “more rooting around in the rubble of the bond crash” piece here:
https://monevator.com/alternatives-to-index-linked-gilts-more-rooting-around-in-the-rubble-of-the-bond-crash/comment-page-1/#comment-1699366
Based on @ZX #17 in that thread: my takeaway is that at $2.5 bn AUM in 2018 BH could be expected to do 20% gross, 15-16% net p.a., but that at $30 bn the gross might be 10% p.a. This would be for 6x number of pods in 2023 compared to 2018 (20 v 120 pods @25mm profit each p.a.) So, perhaps the costs pass through per £/$ invested now would be about half the level that it was with a 12x smaller AUM in 2018 (?) On this basis, would a possible expected ~ 10% p.a. gross return now net down (after the performance fee @20% of the appreciation in NAV per share) to ~7% p.a.?
Addendum (& erratum?) to #14 above: I’ve potentially underestimated the expected future BHMG returns by ~ 3% p a. (7% p.a. v 10%). Based on @ZX #17 in ‘bond crash’ comment thread linked to above, if the profit per pod is effectively fixed only in a percentage sense (20% p.a.), and not in amount ($25mm p.a.), provided that there is sufficient predictable volatility. So, that would give 20% gross and 15-16% net p.a. in an a ‘normal’ vol year. Presumably stretches of low and/or unpredictable volatility with minimal returns (e.g. 5% p.a. gross would net to about 2% p.a. with cost pass through of ~ 2% and the 20% performance fee) would then reduce the expected future net returns from BHMG to historical NAV growth performance of ~10% p.a. (?)
@TLI. The problem is the ‘alpha’ pods are not really scaleable while the ‘macro’ pods are. Let’s say you have an ‘alpha’ pod doing rates relative value trading. They make typically $x/annum using $y capital.
Fund AUM doubles, so you ask them to double their size. They say they can’t. So you go off and hire another pod doing something similar. Great, now you make $2x on $2y of capital. Problem solved. Except you don’t. You find you are making $ 1.75x on $2y. So you add another pod. You now find you are making $2.25x on $3y. And another, and another. So by the time you have 5 pods, the P&L is not $5x but more like $3x on $ 5y of capital.
You cannot scale the % return by scaling pods because they start to exhaust liquidity and cannabilize each others P&L streams. There is a finite dollar value of alpha. So as AUM grows, the macro strategy scales just fine but the alpha strategy doesn’t. Hence it can become unbalanced.
‘Alpha’ type strategies produce a great Sharpe ratio but don’t scale well. Any alpha that can be scaled easily over an extended period quickly becomes systematic beta. Systematic beta usually gets eroded.
Until they went private, another hedge fund called Bluecrest was probably the most similar in style to BH. Take a look at their returns when they were $30bn and then when they went private and traded with $3bn or so. Notice the rather large difference. Yes, with no external clients, they could leverage more but it’s also that it’s much easier to make a massive return on $3bn than $30bn.
Thanks @ZX. Lots of conflicting info out there on effects of lean low vol period in 2017. Figures reported for NYC public pension fund investors’ returns in some Brevan funds seem worse than overall BHMG NAV performance in that time (per above table of past 15 years’ of monthly returns), see this 2018 amusingly written example:
https://dealbreaker.com/2018/02/maybe-howard-actually-needed-all-that-brevan
As return curve for ‘steady as she goes’ ‘Alpha’ type strategies flattens steeply with capital employed; this would make BHMG highly pro cyclical in market move terms. High vol + low AUM = performance up = fund inflows. Low vol follows high = performance crash. Too much capital, too few opportunities (as Alpha capacity constrained) = Redemptions = AUM falls = less capital = higher returns. Sooner or later, vol goes up. Opportunity increases. Returns escalate. Inflows follow. Vol falls. Limited opportunity + capital saturation = poor returns. Rinse & repeat. Predictable hi vol clearly petrol of macro ‘Alpha’ type strategies, as Mar 2020 showed. But vol also seems to be two parts of triple downside of:
a) too much capital = underperform;
b) too little vol = underperform; and,
c) unpredictable vol (e.g. SVB Mar 2023) = underperform.
OTOH:
i). risk of continuing performance issues perhaps already priced into NAV discount; ii). cycle turns (when vol up and/or fewer assets left in BH funds, after redemptions following last bout of poor performance);
iii). likely that bad performance coincides with low vol when, generally, equities do well (+ vice versa, hence diversification).
Further to @ZX #2, 5 and 13, this piece today on the pod model and macro hedge funds is interesting and informative:
https://www.netinterest.co/p/peak-pod
Bit worrying that Ken Griffin thinks the macro game may be drawing to a close.
For my part, just topped up on some more BHMG (now just over 2% of ISA+SIPP+GIA total) using the proceeds of the disposal of the last dregs of a small, legacy HYP kept as a sideshow in a GIA from back when the dividend allowance meant something.
Fingers crossed.
Have taken a small position in BHMG. Seen a steady improvement in the share price and narrowing discount since the article. Good call @TI. Feels very much like some sensible revaluation happening for defensive stocks this month, including RIT too. Definitely a “sell in may” year, feels like the money is returning to the market since 1st September.
The BHMG update this week was worth reading. They describe their issues clearly and candidly. Interesting to see two directors overlap with TwentyFour income fund… also on my watch list!
@KISS #1 and 19: Seriously considering a small position in Flow Traders to compliment the market volatility to price correlation which I hope to get out of exposure to BHMG. Do you sell down FLOW to your allocation target with a short lag after each market volatility spike (and hopefully also a price spike in FLOW) and then buy into FLOW upto your allocation target with a short lag after market volatility sinks? Thinking about doing this with thresholds of buy upto allocation target when VIX less than 15 and sell down to allocation target when VIX is over 25.
Haha @tli, you overestimate my competence and capacity to deliver such a complex strategy. Or overestimate the size of my portfolio to make it worthwhile.
I first bought FLOW in April 2021 @ £33.65 a share. Volatility was high, but declining, and they were due a very exceptional dividend.
I bought a little more in march 22 at £26, eventually sold at £23 in April 23.
Had some decent dividends, but it’s overall been a loss.
Tempting to go back at current £17 though.
Thanks @KISS. FLOW’s an interesting proposition to me because it looks like it could be a potential predictable oscillator. High volatility = higher volumes+ bigger spreads which should mean a profit burst for market maker traders. Obviously, higher volatility is generally bad for shares, as it typically corresponds to panic. But this share seems to work the other way around. That makes it unique, and a possible complimentary diversifier with BHMG.
@TIL, I think we’re getting off topic, but it’s interesting that many of us are looking for perfect hedges & insurance.
There was a monevator article, in very early 2020, that set out “there might be big scary unknowns” out there, and suggested prepping for a worst case scenario could be wise. Almost to the level of suggesting an overseas bank account and very diverse holdings. The comments were quite negative!
I use the username KISS to remind me, Keep It Simple, stupid! TI re-shared a Monevator article with the same name recently, which puts it better than I could, but I do feel when I start looking for strategies like this, I need to remind myself of the mantra to be simple. Keep a sufficient cash buffer to ride out the storms, remember the DB pension I have that will cover the basics, remember passive has been best, and don’t dick around trading too much.
However, the temptation to spot opportunities when the market is wrong is hard to resist. Especially when there’s record valuations of tech. And as long as i’m mostly following the rules (lifestrategy in the SIPP, big cash buffer) then I think I’m safe to play and try to outdo it… but i’ll probably be wrong. Trying to follow a complex mix of shares ain’t cheap.
Might be useful – plenty of other articles available… suggests an approach to buy under 20, sell over 30.
https://seekingalpha.com/article/4591336-is-flow-traders-a-perfect-hedge
BH up another 1% or so today. Flow heading down. I will go back in…
Thanks @KISS. You’ve put your finger on it. I’m afraid I am an over-complicator and perhaps an over-thinker.
At the moment, my 1 year plan is to “bed and ISA” or “bed and SIPP” the existing just over 2% stake in BHMG from GIA to ISA or SIPP before 5th April 2024 and then boost allocation up to 5% over 2024-25. I’m thinking of taking a 5% allocation to FLOW at some point, and then splitting a 5% allocation between Winton Trend (very kindly suggested by @London Yank #4) and a Montlake Dunn trend following fund highlighted by @Algernond under a different thread. Finally, I’m not giving up on the traditional defensive multi asset diversification ITs and will split another 5% allocation across Troy, Ruffer, PNL and Capital Gearing Trust, with the largest single dollop of that funding going to the latter as manager is a very experienced old hand (he’s run CGT IT for the full 41 years). So, that’ll be 20% of ISA + SIPP in diversifiers and the rest for global equities (including a small possibility that I might try momentum trend using LETFs for SP500 and Nasdaq 100 allocation).
I’ve no aversion to Government Bonds per se and, with yields to maturity now way up, I’m also thinking about using some cash savings to buy ILGs for the GIA, especially bearing in mind that there’s no Capital Gains Tax on gains realised from the sale of Gilts. If I buy ones with very low coupons – e.g. 0.125% – the Income Tax payable on the interest should also be minimal. What I can’t decide is what duration I should be aiming for. In some respects, the very longest dated ILGs, whose prices got most severely battered in 2022, look possibly to have best odds of significant capital appreciation.
@TLI – Have you thought about having a blog of your own? You’re asking some interesting questions, planning an interesting portfolio, are doing some deep reflection in this thread and others, and are very articulate… and I get the feeling you could write more! You remind me of some posts by Ermine @ https://simplelivingsomerset.wordpress.com/ – some deep, but broad thinking – This comments area is good, but perhaps you have more to say?
That’s extremely kind of you @KISS. Before May, and signing up for Moguls, I hadn’t posted anything online ever. I had thought about it for years when reading this site from 2008 onwards, but it took subscribing this year to finally take the plunge.
I’m afraid I’m very long winded, and I’ll keep working on concision. I just feel privileged to be able to share thoughts with such excellent contributers on the comment threads, and thereby perhaps contribute in a very small way to this magnificent site.
Excellent conversation and further useful insights, thanks all especially our regular big hitters.
Whilst I need to remind Moguls that I will 100% NOT be undertaking to continue coverage of any Moguls picks — because I’d never sleep, would need extra help, we’d need at least a few thousand members to make that pay as our ‘universe’ grows — I will be dropping in to contribute ad hoc followup, which here will just be to say that the results did indeed include a couple of useful tidbits:
https://www.londonstockexchange.com/news-article/BHMG/interim-report-and-unaudited-financial-statements-2023/16123729
Interesting that the board did make a quick reference to the ‘wealth manager merger overhang potential’ issue, not that they said they were doing much but talking. The results also reminded me that there’s a wind-up vote on the cards if this discount persists, which may protect the near-term downside a tad.
The day before the results the company AGM passed a resolution to enable to repurchase of up to 15% of the shares. Presumably this would be most likely be done to reduce discount (or take advantage of the arbitrage for the benefit of ongoing shareholders):
https://www.advfn.com/stock-market/london/BHMG/stock-news/92033372/bh-macro-limited-result-of-agm
I wouldn’t get too excited about this though; a similar provision was voted through last year so it just seems like an ongoing ‘authorization’ enabling vote, with the buying to be implemented as and when (if at all).
@All & @TI: BHMG doing exactly what it says on tin so far – fairly steadily going up and to right in these difficult times for both global equities and (especially) long bonds. Only regret now is not buying more, but was looking to build up position to 5% over time, and the discount is still there @ ~10% (as of typing).
I had been considering BHMG for a while since ZX first mentioned it in the dim and distant. I set up a limit purchase to buy when the price was 70% off its high and of course it continued to drop after that to 66% in August although now in a tiny paper profit. This is purely an opportunistic – and small – play, but it keeps things interesting. I have set a limit to sell at the next high when it will go back into CSH2.
Well we’re clearly not knocking the covers off the ball here, but I suppose that’s not entirely surprising given equity markets have been ripping.
I suppose we might get a benefit if there is a market wobble in that potential demand for BHMG might also close the discount, giving holders a quick double-whammy. But of course it has to deliver sufficiently compelling NAV growth reality/prospects for that, and it’s not done much at all since this article was published. Flat basically. Plus that’s thesis creep.
Perhaps commentator @ZXSpectrum48K is right in noting it’s perhaps got a bit big to do as well as it did…
Ponder, ponder. I added a few more the other day FWIW but my holding is still pretty small. Perhaps I’ll keep incrementally adding if/as the bull market continues.
Anyway, as ever I DO NOT commit to regular updates on any Mogul articles, have to keep stressing this as I want to pop in to share bits and bobs but don’t want to give anyone the wrong idea. I simply don’t have the time/resources to commit to this, which means anything I do add must be ad hoc.
But I did want to share this research I came across today that is pro-global macro hedge funds as a diversifier generally (i.e. not BHMG specifically):
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4625978
This one (BHMG & article) compliments @Finumus’ recent trend following piece. With Brevan @17% discount now (having traded as high as a 20% premium in last 5 yrs) it compares favourably with say Winton Trend, notwithstanding higher fees (1.88% v 1.06% pa). Although painful to see BHMG @330p again today (NAV 405p); global macro, trend, commodities & gold ‘diversify diversification’ away from just equities & bonds. Whilst it’s always pleasing to see global equities rise; it’s useful to keep something in a negatively or non correlated strategy for when the wheels come off, because sooner or later they always do.
I completely agree with Delta Hedge above, if you hold BHMG as a diversifier with historically negative correlations to equities and other asset classes, then you should not really be too concerned at the moment, considering the rally in the equity markets since October last year. Like TI, I have also been adding small amounts recently at a large discount. Best to buy insurance when it’s cheap. The real test will come when the equity markets really wobble or tank…only then will we see whether BHMG still cuts the mustard.
PS – strangley, Interactive Brokers recently classified BHMG as a CLP (Complex or Leveraged Product) and it’s no longer possible to purchase it on their platform without passing a CLP “knowledge evaluation”. They did not seem amused when I suggested that IB ought to contact the FTSE Group and alert them to the fact that they’ve included a CLP in a major stock market index (FTSE 250).
Joachim Klement today (title says it all):
https://open.substack.com/pub/klementoninvesting/p/the-declining-benefits-of-macro-hedge?
TLDR is still an extra 1% annual alpha.
Apols, should have also noted in my comment #33 above that the research Klement cites is the same Nov 2023 paper (first posted, revised Mar 2024) on SSRN as per the link in @TI #30, although Klement seems to approach it a bit more through glass half empty perspective.
@Delta Hedge — Ongoing conundrum, isn’t it? Performance since they were raising money at a premium to NAV roughly this time last year is flat. Yet the share price is down 21% thanks to the discount moving to a whopping 18%.
I guess the rationale thing for me to do personally is to incrementally keep adding as the bull-ish market continues. It shouldn’t be a bear trap type scenario (like we can get into with a single name company stock or even trust) due to the underlying diversification and so on.
My best guess/hope is (assuming no transformative corporate action before then) one day it’ll be back at NAV having surged in a bear market / crash. Whether that will be enough to deliver acceptable returns we’ll have to see, but starting at a 18% discount can’t hurt.
The ‘selling by wealth managers who are over-exposed’ thesis must be a bit long in the tooth now, I have to concede.
However ‘all investment companies are being shunned/sold by wealth managers’ might still be pretty accurate for ITs as a whole. Discounts back near the historic end of wide…
Thanks for your thoughts @TI which are super helpful and insightful.
My takes:
– BHMG is global equity exposure insurance more than it’s an investment.
– Likely fair price for ‘cover’ premium is NAV. We’re at a 18% discount, so cheap to insure.
– How much cover (BHMG) to buy depends on assessment of risk in global equities.
Like Monevator poster and Substack writer @Indy Inv 3.0 and occasional Monevator poster @Kerry Balenthiran (of 17.6 year cycle fame) my base case is optimism. But I have what I’d assume is a somewhat higher than average guess on the likelihood for really bad ‘fat tail’ outcomes.
My guess is no better (nor I hope any worse) than anyone else’s, and if it turns out right then it’ll likely be by chance, and not by judgement, but FWIW I guess that there’s:
– 50% odds of a face ripping market melt up before end 2035 with the S&P 500 at more than 10,000 (but not more than 19,000) and the Nasdaq at more than 50,000 (but not more than 100,000) at some point in that timeframe.
– 20% odds that by the end of 2035 the S&P 500 and Nasdaq have each stayed in a range from 50% down from now (i.e. no lower than 2,500 on the S&P 500) to 100% up (i.e. S&P 500 no more than 10,000)
– 30% chance something really bad (or a number of really bad things) happen and we at some point before the end of 2035 see below 2,500 (but not below 1,500) on the S&P 500.
Personally, I think it’s worth having 4-5% in insurance cover now in the form of BHMG or something similar.
Good to see the “insurance” investments doing their job, while US has a wobbly few weeks.
7% rise in BHMG in April so far, seems to have recovered some ground but still at discount.
My FLOW shares have had a nice boost – VIX rising has increased ETF trading, their income has risen with a trading update today (25th) showing lots of cash generated in Q1. Up 17% for the month, following a drop for a few months.
Even noticed a rise in my old holding in RIT Capital, still massive discount, but nice to see it heading back closer to value. (up about 10% for the month)
All above FTSE all share / 100 rise in background.
@KISS — Indeed, and I was just pondering the rise in RIT Capital. Can’t see any news. And if it’s a thawing of the private markets, as some media would have us believe, then it’s yet to show up in some other areas of the market such as listed Private Equity. It’s buying back shares but it has been for ages.
I wonder if those US value arbitrageur hedge funds are doing something here too, a la SMT?
(Disclosure: Long BHMG, RCP, and SMT)
359p today on discount down from 18% to 12%. 5 year return would be 52%.
Even so, the discount sits more or less where it was with the volatility spike with Covid in Mar 2020. NAV still struggling at 402p, with the VIX and VXN only just above their 200 Days’ Moving Averages.
A 9% price rally from 328p lows maybe reflective of increasing demand for insurance even as indices retest ATHs (and look as likely to grind higher as to test recent supports)?
Despite very recently topping up on BHMG (partly funded by cashing out of PSH) still feel underweight on this (~3% now, as against at least 4-5% preferred).
ZX summed up benefits very nicely back in June 2022:
“BHMG would have been ideal. Up 40%+ this year, that’s made positive returns in the last 17 out of 20 sizeable equity falls. Yes, the fees are costly, but compared to what? The cost comparison with passive tracker is meaningless since there is no tracker that can replicate what it does. It’s not an equity or bond fund.”
With attempts to buy return stacked US ETFs (especially RSSB) and trend following funds stymied by FCA/MIFID red tape and platform inadequacy, there’s not much out there to compare with BHMG. I don’t fancy giving up a 40% slug of portfolio for long duration bonds that will cramp my returns long term compared to equities and in the short term may continue to sell off with the higher for longer narrative looking ever more plausible.
A nice take on multi strategy hedge funds from Finance TL:DR
https://open.substack.com/pub/financetldrblog/p/multi-strat-hedge-funds-rule-the
Mogul’s alum Capital Gearing Trust is now on the register, and mildly kicking ass and taking names. Well, to the extent you can do that with a giant like BHMG:
https://capitalgearingtrust.com/document/q1-2024-investor-report/
Must admit I hadn’t seen that fee-payable feature referred to. I suppose that’s why Spiller and Co are paid the big bucks 😐
Discount has dipped below 10% (from a high of around 17%) though. Still get the feeling it’d close quick in a crisis, but that’s just a hunch.
Still long. Might add a few more.
I’m also still long BHMG at about 4.5 % AA. I’m with Delta Hedge on this one, in that I regard it as insurance rather than an investment. In this type of market cycle I don’t worry about how it’s performing, or what kind of return it’s delivering. As regards the discount, I think it’s been suffering from all of the various issues that have affected the LSE lately: UK market unloved, ITs unloved by wealth managers owing to cost disclosure fiasco, macro hedge funds probably not that popular since interest rates stabilised. Remember also that people like to buy things that are going up! Upwards momentum will return at some point, but it will need a catalyst, like a reversal in the equity market.
Just seen that James Simons, legendary founder of Renaissance Technologies (1978), and its unsurpassed Medallion fund; died on Friday. Rest In Peace.
Medallion achieved 62% gross, and nearly 40% net, annualised returns from 1988 to 2023 (even besting Berkshire Hathaway’s record), making it the greatest hedge fund of all time.
Simons was an awesome mathematician and geometer, developing Chern–Simons theory in 1974, helping to combine geometry, topology and quantum field theory and influencing string theory’s development; winning the American Mathematical Society’s 1976 Oswald Veblen Prize.
He taught at MIT and Harvard, cracked codes for the NSA (but left over objecting to the Vietnam war) and helped with the development of modern encryption. He was very widely regarded as being the world’s smartest billionaire and gave huge sums (from his $31 billion fortune) to science and maths philanthropy. He was 86.
Interesting taxonomy of hedge funds and their building block role in supporting different aims and aspects of a portfolio:
https://the7circles.uk/hedge-fund-roles-wellington/
BHMG NAV looks to be up and to the right on the chart today and its price has followed.
Not sure what’s working and why now, and why it didn’t seem to work as well as it might have done during the mini Volmageddon event around the Yen carry trade unwind last month.
But, whatever is causing the NAV and price to rise today, please may it continue until October 29 when I need to sell BHMG in my GIA before any changes to CGT etc that there may be in the Budget (in order to then in effect buy it back in the ISA after first selling some SPXP ETF in the ISA to fund that).
I’ll then use the BHMG sale proceeds to buy low coupon short duration ILGs for the GIA.
But I want some more gains on BHMG first to use up the current £3k p.a. CGT allowance before anything might happen to it in the Budget.
I’m no chart technician (Ichimoku Cloud, ATR and MACD anyone?) but it looks like a decent sharp and hopefully meaningful break to the upside on NAV after a loooong period stuck at £4.