BHMU Bh Macro Limited

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Source: BHCM

* This data is unaudited and has been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund. The relative size of each category is subject to change. Sum may not total 100% due to rounding.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets.

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

At NAV: This represents the level of assets in the portfolio that are invested in other Brevan Howard funds and priced or valued at NAV.

Source: BHCM

* This data reflects the combined ASC 820 levels of the Fund and the underlying allocations in which the Fund is invested, proportional to each of the underlying allocation’s weighting in the Fund’s portfolio. The data is unaudited and has been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund and any underlying funds (as the case may be). The relative size of each category is subject to change. Sum may not total 100% due to rounding.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets.

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

The information in this section has been provided to BHM by BHCM.

The USD shares of BHM ended 2018 up 14.16%. The Fund generated positive returns each quarter across a wide range of strategies, with solid contributions from US, European and UK interest rate trading together with developed and emerging market FX trading. At the start of the year, the Fund was positioned for an increase in the level of US rates and a steepening of the US yield curve. As the market moved towards pricing a greater degree of tightening by the Federal Reserve, these positions generated early gains. Over this period, the Fund also generated gains from short-dated basis-trading of US interest rates, as well as from tactical positioning in UK rates as opportunities in those areas improved in line with the increase in market volatility and uncertainty around the direction of policy rates. Heading into the Italian elections in March, the Fund was positioned for an increase in political stress, however the market’s initially muted response to the elections resulted in small losses for these positions.

Through April and May, the market fully repriced the probability of a rate move by the Bank of England which eventually elected not to hike interest rates at its May meeting. This change in market pricing also created good opportunity for the Fund to profit. Furthermore, as the market started to focus on a series of policy proposals from the incoming Italian government, levels of stress across European markets increased. Positions across a variety of European interest rate swap and bond markets as well as FX, credit and equity markets generated strong gains. 

As the year progressed, the directional and yield curve positioning in US interest rates became more tactical, with these strategies generating positive returns each quarter. US interest rate basis-trading also generated positive returns in each quarter. During the second half of the year, good opportunities for FX trading existed across a broad range of developed and emerging markets resulting in positive returns being generated every month. As an example, the Fund was able to profit through option volatility strategies from the sharp moves in the Turkish Lira.

Moving to the economic backdrop in 2018, the year began with a globally synchronised expansion that generated considerable optimism among investors. By the end of the year, the global outlook had frayed with overall financial returns turning in their worst performance since the crisis in 2008. The US was the best performing major economy. Driven by easy fiscal policy and accommodative monetary policy, the US economy surprised on the upside, growing approximately 3% with nearly 2% core personal consumption expenditures inflation. In response, the Federal Reserve delivered four rate hikes, bringing the top-end of the policy range to 2.5%.

Higher US interest rates and the appreciation in the US dollar caused ripples abroad, especially in vulnerable emerging market economies with their own idiosyncratic problems like Argentina and Turkey. Among the other major economies, Euro area growth and inflation undershot expectations. Nevertheless, the ECB ended the expansion of its balance sheet. Political uncertainty in Europe remains high, dominated by populist movements in various countries and the unresolved Brexit negotiations. In China and Japan, growth was uneven and inflation generally disappointed while the monetary and fiscal response was tempered.

The outlook going forward is considerably more uncertain given the tightening in financial conditions in Q4, weaker global growth, and policy-related headwinds from trade disputes. Looking forward, the crosscurrents in the outlook will probably persist in 2019, making for an unsettled macro environment.

Performance by Asset Class

Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class as at 31 December 2018

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Methodology and Definition of Contribution to Performance:

Attribution by asset class is produced at the instrument level, with adjustments made based on risk estimates. The above asset classes are categorised as follows:

“Rates”: interest rates markets
“FX”: FX forwards and options
“Commodity”: commodity futures and options
“Credit”: corporate and asset-backed indices, bonds and CDS

“Equity”: equity markets including indices and other derivatives

Monthly VaR of the Fund by asset class as a % of total VaR*

Source: BHCM. Data as at 31 December 2018.

* Calculated using historical simulation based on 1 day, 95% confidence interval. Sum may not add up to 100% due to rounding.

Performance by Strategy Group

Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group as at 31 December 2018

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Subject to de minimis rounding.

Methodology and Definition of Contribution to Performance:

Strategy Group attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.

The above strategies are categorised as follows:

“Macro”: multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates)

“Systematic”: rules-based futures trading

“Rates”: developed interest rates markets

“FX”: global FX forwards and options

“Equity”: global equity markets including indices and other derivatives

“Credit”: corporate and asset-backed indices, bonds and CDS

“EMG”: global emerging markets

“Commodity”: liquid commodity futures and options

The information in this section has been provided to BHM by BHCM

US

A solid year for the labour market was punctuated in December by extensive job creation, strong wage gains, and an increase in labour force participation. The indicators for real GDP point to above-trend growth in Q4, although tabulations will become increasingly difficult as the ongoing government shutdown postpones key data releases. Core consumer price inflation rose 0.2% in December and 2.2% over the last twelve months. In the wake of a significant tightening in financial conditions since October, Federal Reserve officials calmed markets with promises to be “patient” in raising rates and flexible on running down the Fed’s balance sheet. Meanwhile, dysfunction in Washington seemed poised to worsen under divided government.

UK

The withdrawal agreement that Prime Minister May put forward to parliament was unsurprisingly voted down and she must now find an alternative path. Some ministers have been cited to say the UK’s exit from the EU may need to be delayed beyond the original exit date of 29 March 2019, and the Brexit secretary noted that the risk of Brexit not happening has increased. In general, parliament’s opposition to a ‘no-deal’ Brexit has supported the currency, causing Sterling to rise over 3% in the New Year. Theresa May remains opposed to a second referendum and will attempt to renegotiate with the EU with the aim of being granted further concessions, particularly on the ‘Irish back-stop’, in the hope of gaining a new deal that would foster support within parliament. Meanwhile, the Brexit induced uncertainty has caused economic activity to moderate. GDP is expected to have grown 0.3% q/q in Q4 of 2018, down from 0.6% in Q3 with industrial production likely to detract 0.1ppts from growth. The housing market has also remained weak, putting further downward pressure on house prices. Meanwhile, activity in the rest of the services industry has held up, growing around 0.3% m/m in November. Otherwise, Brexit uncertainty has caused the market to price out expectations of Bank of England rate hikes; a full rate hike is now only priced in by mid-2020, compared to autumn 2019 priced two months prior. The UK stock market has also remained relatively suppressed, with the FTSE 100 still sitting 10% below the 2018 highs in line with how riskier assets have traded globally as well as the higher pound.

EMU

The EMU Composite PMI fell further in December to its lowest level since July 2013, thus unwinding the whole quantitative easing-led cyclical acceleration. As such, the incoming data – both soft and hard - continue to dismantle the market view that EMU growth is robust and only held back by temporary factors. EMU headline inflation fell to 1.6% y/y in December from 1.9% in November, due to unwinding energy inflation. Core inflation remained stuck at 1.0%, confirming that underlying inflation remains subdued and shows little sign of a “self-sustaining” convergence process to target. With the exception of wages (which are responding with the usual lag to past growth), the sharp slowdown in activity does not bode well for the chances of a convincing end to the inertia in core inflation going forward.

Overall, incoming data remain consistent with a weak inflation outlook, in the short-term but also the medium-term. Such an outlook clashes, more than ever, with the bullish inflation forecast published by the European Central Bank (“ECB”) and de facto subscribed to by the market consensus. The ECB’s disappointment on inflation, particularly core, is likely to persist and become a prominent theme as the year progresses, increasingly suggesting that ending net quantitative easing purchases was a policy mistake by the ECB.

Japan

World-wide financial instability also impacted Japan in December.  Equity prices dropped sharply, with the Tokyo Stock Price Index dropping 10% over December.  Interest rates not already pinned down by Bank of Japan monetary policy fell.  The 10-year Japanese Government Bond rate temporarily moved into negative territory.  More importantly for the macro economic outlook, the yen appreciated sharply; against the dollar it appreciated almost 4% over December.  In early January, in a so-called “flash crash”, it jumped another 4%, though most of that crash was later undone. 

The Bank of Japan (“BoJ”) left its stance of monetary policy unchanged at its December meeting.  According to Minutes of the October meeting, members debated the efficacy of widening the bands in which interest rates would be allowed to fluctuate.

Monetary policymakers continue to argue that inflation will begin to move up towards 2%.  At the same time the actual data evince no inclination to do so.  The core rate (consumer price index excluding fresh food prices) has been running at around 1% for a while.  However, even that owed mostly to the faster rate of increase in energy prices.  So-called western core prices (consumer price index excluding all food and energy prices) are up a mere 0.1% over the past twelve months and have been flat on balance on a seasonally adjusted basis for three straight months.  Tokyo prices had moved up a little earlier in the year, but they too have done little of late.  The recent drop in petroleum prices and the appreciation in the yen suggest a further drag on the core rate is in the offing. 

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

bhfa@ntrs.com

+44 (0) 1481 745736