Policy Research in Macroeconomics

What will Mr Vlieghe bring to the MPC from his big tax haven hedge fund?

Today, UK Chancellor George Osborne appointed hedge fund economist Gertjan Vlieghe of Brevan Howard Asset Management LLP as the latest member of the Bank of England Monetary Policy Committee (MPC).  The MPC is responsible for setting the Bank’s interest rate and plays an influential role in national life. So who is Dr Vlieghe, and what is his recent experience? And who are Brevan Howard?

In the Chancellor’s words

Dr Vlieghe is an economist of outstanding ability who brings experience from his time at both the Bank of England and the financial services industry to the role and will be a strong addition to the MPC.

The government press release adds:

Dr Gertjan Vlieghe is Partner and Senior Economist at Brevan Howard Asset Management having previously been a Director at Deutsche Bank. Prior to his move to the financial services industry, he worked at the Bank of England for seven years where he became economic assistant to the Governor, Lord Mervyn King. 

We have no direct knowledge of Mr Vlieghe’s skillset, but the hedge fund of which he is today partner and senior economist is not unfamiliar with controversy and swings of fortune. Nor is he – or it –  untouched by proximity to tax havens and restless shifting of company HQs, all according to profit- and tax-driven whim.  We must hope that Mr Vlieghe has learnt the right lessons from this inside experience, and that his spirit has not been “captured” by the amoral hedge fund ethos.

The company is apparently too poor, or too secretive, to provide any information about itself from its own website (just a single page with a couple of email addresses!). So here’s some brief background via Wikipedia:

Brevan Howard (Brevan Howard Asset Management LLP) is a European hedge fund management company based in Jersey with its funds domiciled in the Cayman Islands.

The company was co-founded by Alan Howard and four others in 2002. It has been described as one of the largest “macro hedge funds” in the world with $40 billion in assets under management (AUM) as of October 2013.

Quitting London

One of the notable acts of Brevan Howard was to up sticks from London in 2010, and move most activities to Geneva in 2010.

At the time, the Dealbook column in the New York Times said:

As London’s hedge fund managers pick up sticks to escape higher taxes and increased regulation, the exodus could end up costing the British Treasury £500 million ($791 million) annually, according to The Financial Times.

This reminds us of the similar patriotism of Ineos and its oft-praised but reactionary boss Jim Ratcliffe – he also moved his firm’s domicile to Swizerland in 2010, in this case with the immediate motive of avoiding paying the overdue arrears of VAT.  

Sam Jones, the FT’s Hedge Fund Correspondent (23 October 2013) tells us

Brevan Howard, the world’s third-largest hedge fund, has moved most of its operations out of the UK, shifting dozens of jobs to the Channel Islands, Switzerland, Asia and the US to escape EU regulation and grow internationally…

By next year, as many as five dozen employees will be based on the Channel Island of Jersey. Although Brevan’s Jersey office has officially served as a headquarters for the company’s holding company since 2005, it previously housed only a couple of administrative jobs.

Operations on the island now include almost all of the hedge fund’s asset allocation, risk management and compliance and HR functions – jobs that were all previously conducted in London.

However, very recently Brevan Howard have done a volte-face, and are returning to London.  This coincides with the new Conservative government’s policy of getting closer and closer to the finance industry, unconcerned that the excessive growth, instability and under-management of this industry collapsed our economy last time round.

Miles Johnson of the FT told us just a couple of weeks ago (12 July 2015):

Brevan Howard is moving some of its most senior traders back to London from Geneva, reversing a high-profile decision by the $27bn hedge fund to leave the UK and bucking concerns that the City’s status as Europe’s leading hub for the industry was under threat… Brevan Howard’s British born co-founder Alan Howard led the charge by moving to Geneva in 2010, in the wake of the introduction of tighter EU regulation of hedge funds.”

Recent poor results

Brevan Howard’s essential business of gambling on interest and exchange rates has often made them big profits, but they have also seen – quite recently – some poor results.

In the FT once more (12 Jan 2014) Madison Marriage wrote:

Brevan Howard, Cantab Capital and Bluecrest were among the worst-performing hedge fund managers of 2013 as uncertainty around the US Federal Reserve’s monetary policy triggered sharp losses for commodity and emerging market managers.”

Four months later, Miles Johnson continued the story (20 May 2014):

Brevan Howard, which manages $37bn and is the world’s third largest hedge fund by assets, has seen the value of its $27bn Master Fund fall by 4 per cent up to the end of last month, driven by losses in US interest rate trading, and currencies, according to the fund’s most recent letter to investors.

The Master Fund has never lost money in a calendar year in its entire history, with the hedge fund well known among investors for adhering to one of the strictest risk management operations in the industry, where traders are frequently fired if they suffer large losses.

While last year, according to investor letters, Brevan Howard made money on the so-called “Japan trade” – which involved shorting the yen against the dollar as a bet on Japan’s government’s commitment to reflating its economy – the hedge fund and its peers have suffered as that trend reversed over the first quarter.”

So bad did things get that, as reported by the Wall Street Journal (Laurence Fletcher and  Anuj Gangahar, 1 February 2015)

For more than a decade, Brevan Howard traced a smooth upward path to become one of the most powerful hedge funds in Europe. In recent months, its fortunes have waned.

Its commodities fund was closed following a run of poor performance; assets under management dropped, with billions flowing out of its flagship fund in the second half of 2014; it posted its first-ever yearly loss and two of its co-founders locked horns in a high-profile legal dispute.

Warning from the FCA

In 2013, Brevan Howard and other hedge funds were on the receiving end of warning letters from the Financial Conduct Authority (FCA), whose CEO’s (Martin Wheatley) recent forced resignation was down to the fact that the Chancellor considered him to be too tough on the finance industry.  That year, the FCA wrote to some of the biggest hedge funds including BH, querying their readiness for higher interest rates (post QE tapering). Again from the FT:

The letters, sent over the summer, have become the subject of discussion among some London-based hedge funds’ legal advisers and have raised eyebrows in what some have interpreted as a sign of the FCA’s new, more muscular approach to supervising market behaviour.

Dumped by pension fund

Brevan Howard are also no longer so welcome at some of the UK’s major pension funds:

The influential London Pension Fund Authority has redeemed its entire investment in Brevan Howard, the world’s third largest hedge fund, after it refused to provide a detailed breakdown of its trading positions.” (FT 5 June 2014)

In similar vein, Miles Johnson and Dan McCrum wrote in September 2014:

Mr Howard is managing a sizeable chunk of the money for [the London Borough of] Camden’s retired public workers. As founder of Brevan Howard, one of the world’s largest hedge funds, Mr Howard has become one of Britain’s richest men in little more than a decade, in part through charging pension funds such as Camden large fees to manage their money.”

Central banks and Chatham House Rules

It does seem, however, that Brevan Howard maintain good links with central banks.  It was at an event co-organised by them – under Chatham House rules – that European Central Bank executive board member Benoît Cœuré (former chair of the Paris Club of creditors) gave out what has been alleged to be  sensitive information that moved the market:

After the remarks appeared, the euro dropped more than 1.2 per cent against the dollar in minutes.  An ECB statement attributed the publication delay to “an internal procedural error” (FT 20 May 2015).

Useful experience

As we said at the start, all of this could be very useful experience for Mr Vlieghe to draw on as he reflects quietly on the future of UK monetary policy. We hope he will have learnt the right lessons for the public interest from his experience of a large, foot-loose, tax haven-based hedge fund.

2 responses

  1. He will be there to represent the interests of Mayfair and the Caymans, since the MPC is already well enough stuffed with people looking after Wall St and Canary Wharf.
    As for divesting himself of his BF holdings, after originally not going to do so, impossible to check so who cares?

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