Tan, investment company analyst at the brokerage firm, has told FE Trustnet on a number of occasions that he is concerned about the state of the market.His major worries are that valuations are too high, implied volatility is low due to investor complacency and there has been far too much central bank intervention.
One way he has been looking to protect his investments is by buying the BH Macro trust, which sits in the IT Hedge Fund sector, as it has demonstrated an ability to make money when every other asset classes is falling.
He says the closed-ended fund’s performance over recent months is a decent signal that the market is about to correct.
“The NAV is on the move and that is always a good sign [of a correction],” Tan (pictured) said.
According to FE Analytics, BH Macro, which has assets totalling £2bn, has returned 6.18 per cent over the last month while the MSCI AC World index is down 0.88 per cent.
While its returns year to date aren’t as good, the graph below shows just how strongly it has rebounded recently.
Performance of trust vs index in 2014
Source: FE Analytics
“It’s doing what it is supposed to do; going up when other asset classes are going down,” Tan said.
“The NAV performance has come through over the last month or so. It is still very early days and one swallow doesn’t make a summer, but it has been trading sideways and even drifting downwards for most of this year.”
Tan isn’t alone in his concerns about the current environment.
The likes of FE Alpha Manager Iain Stewart have warned that some of biggest bubbles of all time are being created while many other managers have been raising cash to protect themselves against a market fall.
However, while there have been a number of potential headwinds so far this year, investors haven’t experienced any major corrections.
Nevertheless, the FTSE has trended downward over the last week due to increased tensions between Russia and the West and Mark Carney, governor of the Bank of England, warned that an interest rate rise “was getting closer”.
As Tan points out, BH Macro has made its money when other asset classes have fallen.
The Guernsey-domiciled portfolio was launched in March 2007 and, according to FE Analytics, it has returned 134.25 per cent over that time. While it has no specified benchmark, as a point of comparison the FTSE All Share 42.9 per cent over the period.
Performance of trust vs index since Mar 2007
Source: FE Analytics
In 2008, when the global financial system nearly collapsed and the FTSE All Share fell a hefty 30 per cent, BH Macro returned 28.36 per cent to its investors.
While its share price fell in the weeks immediately after the Lehman Brothers bankruptcy, Tan says that was due to indiscriminate selling causing its discount to widen as, in NAV terms, the trust was performing well.
Its ability to make money when other asset classes are falling was shown in the months building up to the crash, however.
Following a slight recovery in the FTSE All Share, a period which meant the trust’s share price fell, growing concerns about the banks and housing market caused the index to trend downwards between the months of May and September.
As the graph below shows, BH Marco benefited from the increased volatility.
Performance of trust vs index between 19 May 2008 and 15 Sep 2008
Source: FE Analytics
Tan says the trust’s structure is the major reason for its return profile.
He describes it as “almost Darwinian and survival of the fittest” as the trust’s NAV performance is down to 70 traders working across 10 desks.
When a trader does well they are given more assets and if they don’t they are given less. If they have a particularly poor period, they are shown the door.
“One of the key points is that BH Macro is not a blackbox operation, a bunch of guys following algorithms or mathematical formulas and it is not a computer generating ideas,” Tan explained.
Traders on the BH Macro trust specialise across global equity, credit, sovereign debt, currency and commodity markets and the analyst says these intense conditions mean that the trust does well when more traditional portfolios are struggling.
“A lot of people liken trading to poker,” he explained.
“Like with poker, the best traders need that discipline to know when they need to fold and the mental fortitude to increase their bets when they smell fear. Because of that, this trust should perform well when volatility picks up because it gives the traders more opportunity to trade in and out.”
One of the best examples of BH Macro’s uncorrelated returns was in 2011, when fears over a possible “hard landing” in the Chinese economy and the possibility of the eurozone collapsing caused equities to fall.
BH Macro returned 25 per cent that year when UK equities lost money.
Its major outperformance came during the August sell-off, when fears of the contagion from the European sovereign debt crises intensified.
As the graph shows, the trust moved in an almost completely different direction to the wider equity market during that time.
Performance of trust vs index in 2011
Source: FE Analytics
According to data from the AIC, the trust is trading on a discount of 4.92 per cent, which is wider than its one and three year average.
It isn’t geared and has ongoing charges of 1.95 per cent, plus a performance fee.
