Brevan Howard Asset Management LLP’s $2.7 billion emerging-markets hedge fund sold positions and cut risk by more than half after it lost 11 percent this year amid a market rout, said two people with knowledge of the matter.
Brevan Howard lowered the value at risk, or VaR, for the Emerging Markets Strategies Master Fund by 50 percent in May and at least 30 percent more this month after losses climbed to almost $300 million this year, said the people who asked not to be identified because the firm is private. VaR, an estimate of potential trading losses, can be cut by selling investments and reducing leverage.
“It’s prudent to lower risk when you experience a large drawdown, because if you want to retain investors they will only accept a certain level of losses,” said Donald Steinbrugge, managing partner at hedge-fund consulting firm Agecroft Partners LLC in Richmond, Virginia. “However, when a hedge-fund manager sees their risk significantly reduced, it makes it much more difficult to recover from the drawdown.”
The Brevan Howard fund is overseen by Geraldine Sundstrom, who’s among money managers that have been hurt since May as interest rates have risen, stocks have tumbled and currencies lost value in emerging markets. Investors are redeeming from developing nations at the fastest pace in two years amid slowing economic growth and concerns that when the U.S. Federal Reserve pulls back from its unprecedented stimulus, South American and Asian countries will no longer offer relatively low risk in return for higher-yielding assets.
Sundstrom’s hedge fund fell about 5 percent this month through June 14 after declining 3.9 percent in May, bringing her losses for the year to 11 percent, said one of the people. Hedge funds focused on emerging markets had gained 3.6 percent on average through the first five months of 2013, according to Chicago-based Hedge Fund Research Inc.
Sundstrom, 38, who is based in Geneva, continues to work at Brevan Howard and the firm has no plans to shut down her fund, which bets on macroeconomic trends by wagering on moves for interest rates, currencies, bonds and commodities, said a person with knowledge of the matter. Sundstrom declined to comment on her fund, as did Max Hilton, a spokesman for London-based Brevan Howard at Peregrine Communications.
Clients pulled more than $19 billion from funds investing in emerging markets in the three weeks through June 12, the most since 2011, according to EPFR Global, a Cambridge, Massachusetts-based firm that tracks fund flows. The redemptions started after Fed Chairman Ben Bernanke told U.S. lawmakers May 22 that the central bank would scale back its asset purchases if employment continued to show “sustainable improvement.”
JPMorgan Chase & Co.’s Emerging Local Markets ELMI Plus Composite index, which tracks developing currencies, is down 1.4 percent this quarter, while the Indian rupee hit a record low last week and the Brazilian real fell to its lowest since 2009.
“The era of structural outperformance” for emerging markets is “probably over,” Goldman Sachs Group Inc. economist Dominic Wilson wrote in a report yesterday. Moves in currencies and interest rates in the past two months “have previewed what may lie ahead,” he wrote.
Bernanke expanded on his earlier comments yesterday, telling reporters in Washington that the Fed may this year start reducing bond purchases from the current $85 billion a month and end the stimulus completely in 2014. The MSCI Emerging Markets Index slid 3.3 percent today to 915.94 in Hong Kong following his remarks, the benchmark’s lowest level since July.
Brevan Howard, Europe’s second-largest hedge-fund firm after Man Group Plc with $40.1 billion of assets, cut risk in the emerging market fund and Sundstrom sold holdings before Bernanke’s statements yesterday, the people said.
Sundstrom’s hedge fund has produced an average annual return of about 5.8 percent since 2007, when she joined Brevan Howard from Louis Bacon’s Moore Capital Management LLC. She worked as an investment analyst at Citigroup Inc. before her four-year stint at Moore Capital, according to her registration with the U.K.’s Financial Conduct Authority.
Brevan Howard’s Master fund, its biggest with $27.9 billion of assets, has never posted an annual loss since starting in April 2003. The firm, co-founded by former Credit Suisse Group AG (CSGN) trader Alan Howard, is known for its discipline in quickly and aggressively cutting positions when traders lose money.
The firm historically cut risk and took capital away from traders whose portfolios fell 4 percent, Bloomberg Markets Magazine reported in 2009. An 8 percent drawdown triggered a change in a trader’s mandate and Brevan Howard required those who lost 12 percent to stop trading entirely, Bloomberg Markets reported at the time.