The board of BH Macro (BHMG ) has calmed concerns about its share price after the merger of wealth managers Rathbones and Investec swelled their combined stake to 26% of the hedge fund.

Chair Richard Horlick said fears of a ‘significant overhang of stock’ triggered a drop in the sterling shares from a 7.9% premium last February to a 10.4% discount by year end on 31 December, annual results published in March showed. Since the report the deficit has narrowed from 21%, its widest ever, to 16%.   

Horlick said investors should not be concerned, given the Takeover Panel has confirmed the combined wealth manager is ‘not under any obligation to make sales of the stock’ and the trust will ‘be able to stand or fall on its net asset value (NAV) per share performance and the relative attractiveness of other investments.’

It wasn’t just the merger that put investors on edge, as Horlick said 2023 had been a ‘rollercoaster’ year, which started out with a £315m equity raise but quickly deteriorated.

Horlick said the first six months brought ‘the greatest reversal in interest rate expectations for 40 years’, leading to the worst every drop in net asset value for the Cayman Island-domiciled Brevan Howard Master Fund, which BH Macro invests in.

‘The increase in interest rates and the competing attractiveness not just of cash, but other investment vehicles means that it is a challenging environment for macro funds,’ said Horlick.

‘However, this difficult and volatile environment is one in which historically the Master Fund has flourished.’

Horlick noted that the geopolitical and economic environment remains ‘highly uncertain’, with the US presidential election increasing ‘uncertainty for the global economy and political stability worldwide’.

He said the board has ‘absolute confidence’ in Brevan Howard, and with so much uncertainty ‘your board believes the company represents an attractive diversifying investment uncorrelated to both bond and equity markets’.

The underlying portolio fell 1.8% over the year in the sterling share class and 1.33% in the US dollar share class, while the shares dropped 18% and 17%, respectively.

While the annual report doesn’t give detail on the portfolio positioning, JPMorgan Cazenove’s Christopher Brown said BHMG appeared to have reduced its US interest rates positions by the end of February. Current long positions now include Japanese rates, where it is four times levered to changes in Japanese two-year government bonds and three times to the 10-year bond.

The board started buying back shares in December, which delivered a 2% narrowing to 13% to 11%, which have since tailed off. If the board buys back more than 5% of shareholder capital, a 2% fee is triggered. Brown said that at current levels, it was worth it. 

This is an issue because if the discount remains wider than 8% over the year - it currently averages 14% - then shareholders will be offered a discontinuation vote in early 2025. It requires 75% approval from voting shareholders, meaning Rathbones’ vote would be key.

‘Even if passed, it would then take another 12 months for investors to be paid out at the then NAV. But at the moment, a purchase of the shares by the board is a surefire way that BHMG can add to its NAV returns, and in our view is a good use of cash. We remain “overweight”.’         

Investors pay a lot for the diversification that the fund provides. Ongoing charges fell from 6.11% in 2022, when it delivered a comparatively strong return of 22%, to 2.16% last year as a result of there being no big performance fee to pay.