Brevan Howard to Return $2 Billion to Clients of Biggest Fund

Brevan Howard Asset Management LLP, the hedge fund run by Alan Howard, will return about $2 billion to investors in the firm’s biggest fund, keeping a promise to clients to limit the size of the $26.9 billion pool.

Investors in the Brevan Howard Master Fund have told the London-based firm they want assets to remain at about $25 billion to ensure it continues to produce good returns, Brevan Howard Chief Executive Officer Nagi Kawkabani said in an interview today. Assets rose after the hedge fund posted investment gains of 11 percent this year through August.

“It has nothing to do with the opportunity set we see in the markets,” Kawkabani said. “We made a promise to our investors, and we feel we have to do the things that we told them we are going to do. Otherwise, we lose credibility.”

Brevan Howard joins Caxton Associates LP and SAC Capital Management LLC in taking steps to limit the size of hedge funds managed by the firms. Investors scrutinize assets because of concerns that funds can become too big to find profitable trades.

“When the amount you are managing is above a certain threshold, what you are doing can be visible to other market participants,” said Jacob Schmidt, founder of Schmidt Research Partners Ltd., a London-based hedge-fund advisory firm. “You can also influence the market through your buying and selling.”

Caxton Associates, the $10 billion hedge fund run by Andrew Law, told its clients last week that it will restrict the amount of money it takes in. Steve Cohen’s $14 billion SAC Capital Management LLC decided earlier this year to close its biggest fund to new clients. The fund, which opened in 1992, had remained closed for its first 13 years before re-opening to investors in 2005.

Macro Fund

John Thaler’s JAT Capital Management LP, with $2.5 billion, has decided to stop marketing its fund for the time being, and won’t be taking new investments beginning next month, according to two people familiar with the plans, who asked not to be identified because the information isn’t public. The New York- based fund has climbed 35 percent this year, the people said.

Brevan Howard’s Master Fund is managed by Howard and a team of traders. A so-called macro fund, it invests in liquid assets, including currencies and interest rates, to try to profit from global economic trends.

Brevan Howard could pick and choose which clients get their money back, or it could return money to investors in the fund on a pro rata basis. The firm isn’t likely to make investors take withdrawals if they’ve shown a commitment to the hedge fund over a long period of time, such as those who haven’t submitted redemption requests, said a person familiar with the matter who asked not to be identified because the company is private.

6.2% August Gain

Brevan Howard has faced recurring questions about the size of the Master Fund from investors, and acknowledged the scrutiny in a November 2009 statement. At the time, Brevan Howard said it would recommend to the firm’s board of directors that money be returned to clients “if and when we sense that a fund cannot deliver an attractive return because of the size of its assets relative to market opportunities.”

The fund gained 6.2 percent in August, its best month since February 2008. The returns came in a month when hedge funds on average declined 1.6 percent, the industry’s worst performance since May 2010, according to data compiled by Bloomberg.

Brevan Howard’s Master Fund made most of its profits last month from “being long fixed-income markets globally via swaps and options,” according to a statement the company sent to clients yesterday. In August, Treasuries posted the biggest monthly gain since December 2008 after investors ignored Standard & Poor’s downgrade of the U.S.’s credit rating and sought a refuge in safe securities due to signs of slowing growth.

Euribor Bets

“In recent months, the prospect of the U.S. economy sliding into recession has become increasingly likely,” BH Macro Ltd., a publicly traded company that raises money for the Master Fund, said in yesterday’s letter to investors. “In August, as a response to these fears, markets reacted and caught up with our macro views.”

The Master Fund had “minimal exposure” to financial stocks and wasn’t betting on declines for debt of European countries such as Greece, Ireland and Portugal, the letter said.

Brevan Howard has also probably made money this year by wagering that the volatility of interest rates would rise because of uncertainty about the prospects for growth in the U.S. and Europe, according to a report by Tom Skinner, an analyst with JPMorgan Securities Ltd. in London. The Master Fund has profited from a bet that the short-term lending rates between European banks, or Euribor, would decline, Skinner wrote in the Sept. 5 report.

Other Founders

Brevan Howard’s Master Fund gained 1 percent last year, 18.7 percent in 2009, 20.4 percent in 2008 and 25.2 percent in 2007, according to data compiled by Bloomberg.

Howard, 48, founded Brevan Howard in 2002 with four other traders from Credit Suisse Group AG’s proprietary fixed-income trading desk. James Vernon, the chief operating officer who represented the “V” in Brevan Howard’s name, decided in July to leave the firm. Jean-Philippe Blochet, who represented the “B” in the company’s name, left the company last year.

To contact the reporters on this story: Jesse Westbrook in London at jwestbrook1@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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