Letter #288: Alan Howard and George Osborne (2023)
Brevan Howard Founder and Robey Warshaw Partner | The Keys to Managing Money & Risk
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Alan Howard is the founder of Brevan Howard. He started his career at Salomon Brothers, where he was assigned to the Eurobond desk. He then moved to the London securities arm of Tokai Bank to head interest rate trading in Europe. Next, he joined Credit Suisse First Boston as a trader before being promoted to Head of Proprietary Trading for Fixed Income in Europe. His team generated $500mn in profits for CSFB, before leaving to start Brevan Howard in 2002, which peaked at $40bn of AUM in 2013 across nine funds, downsized to $18bn in 2016 across three funds, bottomed at $6.3bn in 2018, and as of 2023, managed $35-40bn.
George Osborne is a Partner at Robey Warshaw. He started his career as a freelance journalist for The Daily Telegraph, before joining the Conservative Research Department and becoming the Head of its Political Section. He then worked as a special adviser to Minister of Agriculture, Fisheries and Food Douglas Hogg, in the Political Office at 10 Downing Street, working on Prime Minister John Major’s campaign team, and then for William Hague as a speechwriter and political secretary, also helping prepare him for the weekly session of Prime Minster’s Questions, playing the role of Prime Minister Tony Blair. After his stint on the Prime Minster’s Questions team, he was elected as the Member of Parliament for Tatton, Cheshire, before being appointed to the Shadow Cabinet as Shadow Chief Secretary to the Treasury, and then promoted to Shadow Chancellor of the Exchequer. After a few years, he was appointed Chancellor of the Exchequer. After half a decade as Chancellor, George became the editor of the Evening Standard and an advisor at BlackRock before ultimately joining Robey Warshaw as their first-ever external partner hire.
Today’s letter is the transcript of a conversation between Alan and George. In this conversation, Alan shares introduces his namesake fund, why they opened an office in Abu Dhabi, persuading talent to move there, general migration patterns, the importance of in-office, in-person work, trading volatility during the Financial Crisis, lessons learned from that period, and the foundations it laid, trading when Covid first emerged, predictions for the next few years, issues that may arise, and thoughts on building and running a large multi-strategy firm.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
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George Osborne: Thank you for having us at this tremendous event. Alan and I have been friends for 20 years. He went into the hedge fund business, I went into the politics business, and more recently, into banking. And one of the things that I've seen Alan do is build his business here in Abu Dhabi. So I'm gonna start, Alan, just for those who know a bit about Brevan Howard but perhaps not everything about Brevan Howard, tell everyone about the incredible hedge fund business that you built that bears your name.
Alan Howard: Thank you very much, George, for that wonderful introduction. So I started Brevan Howard about 20 years ago. We are a macro hedge fund, with around 35bn AUM. We have made about $28bn for profits for our clients over that time. We're known for trying not to lose too much money, and therefore we haven't lost in any month or year, more than a low single digit since we started. And that's given us confidence for our investors. We have about 1000 people, 140 portfolio managers, and $1 invested in us at the beginning 20 years ago is worth around $5.50 today.
George Osborne: [Inaudible] Abu Dhabi. And it's--for those who visit the office, this is not some brass nameplate on a door with all the kind of real business being done somewhere else in the world, it's being done here. And you must have had lots of other places you could have gone to do that. Why did you pick Abu Dhabi? And why did you decide to do it in the way you've done it, which is kind of all in?
Alan Howard: There are multiple reasons. And the first one is, about a year ago, I met His Excellency, Ahmed Jasim Al Zaabi, and it was very clear from that meeting that he's a pragmatic regulator, who has worked in the private financial sector, therefore understands our needs, whilst at the same time, being conservative regulator that can look at traditional markets as well as digital markets. And that--for us, the most important thing when we open an office is the strength of the regulator. And in this case, I felt extremely confident and was encouraged by all my meetings with Ahmed Jasim, together. There's only one problem with Ahmed Jasim, and that is that he supports the wrong football team. Chelsea, unfortunately.
George Osborne: That's my team. I've got no problem with that.
Alan Howard: The other--and then the multiple other reasons are: the second and most important reason for us is UK rule of law. When the ADGM was started 7-8 years ago by Ahmed Ali Al Sayegh as the first--one of the most important decisions he made was to have UK rule of law. And that gives you again, good confidence. And you saw that in the decision on [NSE] Healthcare this year, UK rule of law is being implemented. That is extremely important for investors such as ourselves. What's underappreciated is the timezone for trading macro. This, I think, is the best time zone in the world to trade macro better than anywhere else. You can see the BOJ, or what's going on in Asia at the beginning of the day, and at the end of the day, you can see the Fed and what happens at a more reasonable time. So that is an incredible advantage of Abu Dhabi. And because of that, we've also moved our execution desk all to here. Because we do feel it's the best place to trade macro. The other reasons are, of course, the fiscal-- the tax situation here allows us to encourage some people to move from other higher tax jurisdictions here. And also the Abrahamic Accords. The great vision of His Highness Mohammed bin Zayed to go ahead with prioritizing economic to help peace in the region--it's a great thing. And if you get a chance, the Abrahamic family house is one of the only--it's the only one in the world where you have a mosque, church, and synagogue all together in the same area. And I've spent time visiting that. And when it started, when the idea started three years ago, there was some skepticism if it would actually get used. And this weekend, they had over 2000 people using that. So these are all the initial reasons which encouraged me to come here. Once you start thinking about that, it became clear to me that Abu Dhabi could become a global financial center. And to do that, it needs to focus on capital markets, which is trading and liquidity. If you think about the top three US banks, Morgan Stanley, JP, and Goldman Sachs, they make between 40-60% of their revenues from markets. So I think for Abu Dhabi to become that global financial center, which has a great opportunity, then that's the area it needs to focus on. Now saying that, we have already 60 people here, and we will be 120, probably looking for a new office, by the end of first quarter next year. And the important part about that is we bought a lot of our senior people, because that's the way to help a financial center grow, by getting that human capital here. And the other thing I would say is that hedge funds sit at the top of the food chain. We are one of the top 10 clients, for the banks, globally, in terms of the wallet they make from us, and the top non-US hedge fund in terms of what the banks make in terms of commissions from us. So as you get more top hedge funds with their top senior people coming here, that can lead to the banks having to send their best people as well, to service correctly, those traders, and other parts of the financial sector, as well as all this ancillary services, such as compliance, legal, which are more than a ratio of 4:1. So I think there's a great opportunity for this to become a financial center. And that's part of the reason we're here as well. And over time, that will generate cash flow for Abu Dhabi additional to the return it makes on its investments. And that balance is a great thing for the future. So those are all the reasons why we're here. And delighted.
George Osborne: I mean, I think the interesting thing is that people might have thought a couple years ago, that you didn't have to--what you're talking about is having physical people on the grounds, that this can't be done remotely, that Abu Dhabi needs to encourage senior people in this industry, finance, to locate here. And you say you've got 120 people coming here, 60 already. Have you found it hard to get people to come here? Or do you just order people to come here? How do you persuade--because you're in a famously competitive industry, at the moment, where the top talent is competed for amongst you and your competitors. So how have you managed to persuade people? Or do they not need persuading?
Alan Howard: It's been an amazing experience. Because when I decided last year, after my meeting, we're going to do this, after thinking about it, of course, were the reasons I gave you--people have come on their own. We've not forced anyone to come. On the contrary, I think we're seeing people migrate here from parts of Asia and the UK for the various reasons I gave you. And it's very easy here as an outsider to bring that talent in here. It's quite easy to get the visa, etc. So now we found it very easy. Now we have a small number of our people, they can live in Dubai or another place, and just commute, but they have to work in the office. That's what we want. And we know--
George Osborne: You're not a work from home guy.
Alan Howard: We're not a work from home guy. No, absolutely not. That's another topic. So no, we haven't found it at all--and once you get those people to come, they want to come for the reasons I gave. It may be because we're not an American company, therefore, there are some advantages--it's a bit closer, etc. The rest [inaudible]. And that's why we are where we are. And I think that we have a chance to, because of where we are, to maybe--others can come as well, for the reasons I gave. And I think in a way Abu Dhabi probably undersells itself, for the reasons I gave you, of why this is an incredible place--definitely for what we do, which is trading markets.
George Osborne: So let's get on to those markets. Macro is back--that's the sort of big message. Before I ask you about the current state of the world, and where you think it's going, maybe we'd sort of do a bit of history. So Alan and I, back in 2007, in the early summer of 2007, we were both in Denver, we were attending a conference in Denver. And we had traveled there together. And I remember you telling me, Alan, that something really bad was about to happen to the global economy. And I was, at that point, the British Conservative Party's Treasury spokesman, finance spokesman. And I thought, well this is interesting. No one else is telling me that things are about to go wrong. And you were the first person in my world that told me that a financial crash was coming. Just tell me something about that experience, because it was so formative for Brevan Howard. You made a lot of money during that period, you traded on the volatility. And you, I think, predicted the behavior of the central banks and the governments in that key couple of years. Looking back on it, what are the lessons from that period, and what did it lay the foundations for in the 15 years since?
Alan Howard: So, because we think about the downside all the time when we manage money, because for us, the most important is keeping the money safe and doing a good job. We always have that in our mind. And when we were discussing about a year before it started, there were signs of--and the other thing I will say is we spend a lot of time looking at the weeds of the market. And in this case, it was some of the French banks, where you could see some beginning signs of distress in the money market. So by looking at, and really understanding the plumbing of markets, and what markets all about, it allows you sometimes to predict what's going to happen, but more importantly, to be ready for those events because no one knows they're going to happen for sure. And to be make sure that you're in a good position when they happen. So if we go back to, 07/08, after the Bear Stearns bailout, we immediately started unwinding any counterparty risks with Lehman Brothers and others--with some of the others. And with Lehman Brothers in particular, with those counterparty risk, you have to realize that you may think you've unwound all your risk, but you haven't. And one of those easy ways of still having the risk on was at the repo--the repo is not in your book, but actually, you're gonna get the securities back a bit later, but it's not on your book. So we went through, in-depth, every single thing, because we didn't know what was going to happen with Lehman--we thought there was a risk, but we were certainly not predicting they were going to do what they did. But by being in a position where we didn't have any exposure to them at all, coming into the event, we were in a very strong position to take advantage of the markets. The second thing we did that week was that we had select exposure, of course, to some of the American banks, the two or three top ones. And clearly, as the week went on, things started getting bit hairy, so we decided, immediately, to move all our margin, our variation margin, that day, to Bank of New York, into a segregated account, which means it could never be hypothecated or touched. One bank--some bank--one or two banks--one of the banks didn't. We started to unwind the trades, and then by the end of the day, the CEO called me up and said, We're moving it. So that's what we did. So we were very--after the first week of Lehman, we had hardly any risk on that could bother us, shall we say. Once you're in that position, with market stress, you really aren't--a chance to take advantage of them or trade the markets cleanly, shall we say. And that's why we managed to take advantage of the opportunity that came out on that specific period.
George Osborne: So that then led to a long period of, as Ray was saying, zero interest rates, free money, which is not easy for a macro fund, is it? And then you come to COVID, which is, I guess, the next sort of big shock. And again, the central banks step in. Tell me about your sort of experience of that. And I know from our many conversations, I think you're a little critical of how the--I'm putting it mildly--he is very critical of how the sort of central banks and the fiscal authorities handled 2020 and 2021.
Alan Howard: So you're right, that period was not the best time for macro traders like ourselves. But you have a choice: Do you decide to change your strategy to take risks you're not comfortable with? Or do you decide to make slightly lower returns in that period, that are still acceptable? No, as I mentioned, no loss more than low single digits. But of course--and I decided to stick to that, which I'm very happy I did, because of what happened in COVID, and what's about to happen. Coming into COVID, we, in this case, because we look at economic models, history, and also the human behavior of participants in the market, we felt there was a risk of this coming into more financial issues. So didn't predict, of course, didn't predict COVID, but because we looked so much into structuring our trades and the sizing of bets, as opposed to just investment choice, we managed to position ourselves very well in that period of January, February, so that if something did happen, we pick the right asset class and then response functions we thought would happen.
George Osborne: I mean, you had spotted there's a disease in China, you were looking at what epidemics do, just in the past. So this is long before the kind of first lockdowns in Europe.
Alan Howard: Yes, but the information was all available on the web. Just using it to say, if this happened, how would you structure and size your transactions to take advantage of that? And were there good asymmetric bets, whether you use Merton [model] or Kelly Criteria, etc., to value those bets. And for us, there was a potentially great opportunity if that happened in certain asset classes. So when it happened, of course we had great returns. My own fund that I was running at the time made over about 100% in that first three months of the year. All our funds did very well. Now, the decision that they made to--what they did of doing $1tn of QE in the space of a week, followed by the fiscal shock--addition that happened later, that did save the market--obviously from our point of view, we'd prefer they didn't do anything, because we would have made a lot more money, but I think that that was a bad--overdid it, and has lead, helped, where we're going to happen the next 10 years. That ramification of the action reaction of those decisions after 15 years of QE, that's probably going to reverberate over the next 10 years.
George Osborne: So in 2007 you told me there was going to be a financial crash. In January 2020 you said COVID was going to have a pretty devastating effect. So what's next? I'm not sure three times lucky--lucky for your investors, but not necessarily for the world. What's your prediction or your anticipation of what's going to happen over the coming years?
Alan Howard: Yeah, I think over the coming years, what we're going to see is that 15 year period of zero rates, which allowed everyone to buy anything they wanted, in any form, in any esoteric form, lower interest rates every time there was an issue by the Fed, in other words, they came out to bail out everyone over that period, so the mentality of everyone was, Buying assets is easy. You can pay up, you don't have to worry about liquidity. And valuations continue to rise. That period is completely being shattered. And part of that reason is because the central banks in 2022 got it slightly wrong, because the way they had been for many years, looking at the markets, is by having a target, and inflation expectations, watching inflation expectations in the market, and if they were in line with a target, that meant that inflation, short term, which was affected in there by inflation expectations, would be under control. We've seen in 2022 that that was not the case at all. So it's going to have a review of those central bankers thinking about how to use models into their own thinking of how to set rates. But it means two things: 1) they will on the margin be much more hawkish there used to be, A) less trusting of the models, and B) to ensure that they don't get caught--to restore some credibility that they may think they've lost. And secondly, the amount of debt that's been created over those 15 years means that, including the queue, including the private and the public sector, not just public sector, is going to mean many more issues coming up. So I think that--
George Osborne: What do you mean by more issues?
Alan Howard: More volatility in the markets, because the bailing out, or the coming in of the central banks, if they do come in, it'll be at a much lower level of asset prices than they're used to. So my view is that we're going to have a 5-10 year golden period of macro trading. More volatility in assets and economies, including deglobalization, which we saw William Burns, who's the head of the CIA, said a couple of months ago, that the world is going through a plastic moment he hasn't seen since the Cold War. All those things are going to mean opportunities for macro traders like ourselves, globally, with different reaction functions. So it's a great period for us, I believe, coming up the next 5-10 years. And because--and I feel vindicated for not changing our behavior pattern in that period before. So we're set up, in my view, very well for that period by looking at structuring, sizing, models or trades, very low leverage, and being flexible.
George Osborne: So we've only got about a minute and a half left. I mean, I think one of the interesting things having watched your career and the business you've built is that it's gone from being kind of Alan Howard's view of the world, and then you double down on that, to building a firm where you have lots of traders, lots of views, in a multi-strategy fund. And so Brevan Howard is in some ways, sort of bigger than you now.
Alan Howard: Yeah.
George Osborne: How do you run that kind of firm? It must be quite different from sort of just backing your instincts and--you've now got lots of people you need to manage. How do you manage risk in that kind of firm? And what are the future of these kinds of multi strategy hedge funds?
Alan Howard: So firstly, I brought in--Aron Landy, whose my risk manager for 20 years, I made him CEO, and allowed him to run the firm. He's much better than me at doing that, as you said. But we have two things. We have single manager funds, let's say the older way, one or two funds which are pure macro and have a very small number of managers, who I try and train them in way I believe is the way to trade, some of those, the younger ones. And then we have the multi-manager funds as well, which--so we give investors a choice of what they want. So we're a hybrid of a multi-manager fund, as well as some single manager funds. Small number. And that's the way we want to build the company up, not to be just one or the other. And I think that allows us, also, to be flexible to start new funds when we think there's opportunities.
George Osborne: And finally, more and more people based here in Abu Dhabi--
Alan Howard: We are going to run out of office space, I'm confident, sometime early next year.
George Osborne: Well, if there are any property developers in the room, you heard it here first. Thank you very much.
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