The Keys To Managing Money & Risk: In Conversation with Alan Howard

[Music] here um uh thank you for having us at this tremendous event um Allan and I have been friends for uh 20 years he went into the hedge fund business I went into the politics uh business and more recently into banking um and one of the things that I've seen Alan do is build uh his business here in Abu Dhabi um so I'm going to start Alan just by for those who know a bit about brev Howard but perhaps not everything about brev Howard tell tell everyone about the incredible um hedge fund business that you built that bears your name thank you very much George for that wonderful introduction so I started uh brevan Howard about 20 years ago we are our macro hedge fund the with around 35 billion AUM we we have made about 28 billion of dollars for profits for our clients over that time we're known for trying not 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 uh for our investors we have about a th000 people 140 portfolio managers and the dollar invested in us at the beginning 20 years ago is worth around $5 half doar today ababi um and it's for those who visit the office this is not some brass name plate on a door with all the uh 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 Allin there are multiple reasons and uh the first and the first one is about a year ago I met his Excellency Aki malabi and it was very clear from that meeting that he's a pragmatic regulator who's worked in the private sector there therefore 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 and 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 and encouraged by all my meetings with aked jazim to get there there's only one problem with aked jazim and that is that he supports the wrong football team Chelsea so unfortunately so um that's my team I've got no problem with that the other and then the multiple other reasons are the first the second and most important reason for us is UK rule of law when the atgm was started s eight years ago uh by ammed Ali alai as the first per the 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 Ms Healthcare this year you UK role of law is being implemented that is extremely important for investors such as ourselves what's underappreciated is the time zone for trading macro this I think is the best time zone in the world to trade macro better than anywhere else you can 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 and because of that we we've also moved our execution desk all to hear uh because because it's a we do feel it's the best place to trade macro the other reasons are of course the the the fiscal the tax situation here allows us to encourage some people to move from other higher tax jistic jurisdictions here and also the Abraham Accords the great vision of His Highness Muhammad Muhammad bin Z to go ahead with uh prioritizing economic to help peace in the region is an a great 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 a mosque church and synagogue Al together in the same area uh and I've spent time visiting that and when it started when the idea started three years ago there were some skepticism that actually get used and this weekend they had over 2,000 people using that so the these are all the initial reasons which encourage me to come here once you think once you start thinking about that it became clear to me that that Abad Dhabi could become a Global Financial Center and to do that it needs to F focus on Capital markets which is um trading and liquidity if you think about the top three US Banks Morgan steinley JP and Goldman Sachs they make between 40 and 60% of their revenues from from markets so I think for for ABAB to become that Global Financial Center which has a great opportunity then 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 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 as we are and that we are one of the the top one of the top 10 C clients for the bank's 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 uh those Traders and other parts of the financial sector as well as all the anciliary services such as compliance legal which are more in a ratio of 4:1 so I think it'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 to 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 uh delighted I mean I think the interesting thing is that people might have thought a couple years ago that you didn't have to you know what you're talking about is having physical people on the ground that this can't be done remotely uh that ababi needs to encourage senior uh people in this industry Finance to locate here um and you say you've got 120 people coming here 60 already you have you found it hard to get people to come here or or do you you know do do you just order people to come here or um what what's the uh how do you persuade no because you're in a famous competitive industry at the moment where uh you know the top talent is competed for amongst the the you and your U competitors so how have you managed to persuade people or do they not need persuading yeah it's been an amazing experience because when I when I decided last year after my meeting we're going to do this after thinking about it of course with 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 from parts of Asia and and 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 easy to get the visa Etc so now we found it uh very easy now we have a small number of our people they can live in Dubai or other place and just commute but they have to work in the office that's what we want and we know we uh I think you're not a work from home guy we're not a work from home guy no absolutely not that's another topic uh 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 it may be because we're not an American company therefore there are some advantages it's a bit closer Etc the rest Nobles and that's why we are where we are uh and that's and I think that we have a chance to be because of our situ where we are to maybe others others can come as well for the reasons I gave and I think in a way Abu probably undersells itself for all the reasons I gave you of why this is an incredible Place definitely for for we do which is trading markets so let's get on to those markets and you know macro is back that's the sort of big message um 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 Allan and I um back in 2007 in uh the early summer of 2007 we were both in Denver we were attending a conference in Denver and um we traveled there together and um I remember you telling me Alan that um something really bad was about to happen to the global economy and I was at that point the British conservative party's uh treasury spokesman Finance spokesman um and I thought well this is interesting no one else is telling me that uh things are about to go wrong um and you were the first person in my world that told me uh that a that a financial crash was coming um just to tell me something about the 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 uh key couple of years looking back on it you know what are the lessons from that period and what did it lay the foundations for in the uh 15 years since so I 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 in our mind and when we were discussing about a year before the financial it started there were signs of of and and the other thing I would 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 if you where you could see some beginning signs of distress in the money market so by looking really understanding in dell 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 cu no one knows they're going to happen for sure uh and to be make sure that you're in a good position when they happen so if we go back to 0708 after the best Sterns bailout we immediately started unwinding any any um uh counterparty risk with Leman brothers and others with some of the others and with Leman Brothers in particular with those counterparty risks you have to realize that you may think you've unwounded all your risk but you haven't and one of those easy ways of still having the risk on was of the repo the repo's not in your book but actually you're going to get the Securities back a bit later but it's not in your book so we went through in depth every single thing because we didn't we didn't know what was going to happen with Lans we thought there was a risk but we certainly not predicting it was going they were going to do what they did um 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 that week uh was that we had some exposure of course some of the American Banks one of the two or three top ones and clearly as week the week went on things started to get bit hairy so we decided immediately to move all our margin of variation margin that day to Bank of New York into a segregated uh account which means it could never be hypothecated or touched One Bank some bank one or two Banks aged one of the banks didn't we started to unwind the trades um and then by the end of the day the CEO called me up and said we're moving it so so that's what we did so we were very CAU we after the first week of LeMans we were had hardly any risk on that could bother us shall we say once you're in that position with Market stress you really are in a chance to take advantage of the 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 on that specific period so that then led to a long period of um you know as Ry was saying you know zero interest rates free money which is not easy for a macro fund is it um and then you come to covid uh which is I guess the next sort of big shock um 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 mly he's very critical of how uh the sort of Central Bank s and the fiscal authorities handled 2020 and 2021 so you so you're right that period was not the best time for macr Traders like ourselves but you have a choice do you decide to change your strategy to take risks you're not comfortable with or you decide to make slightly lower returns in that period they still acceptable no no as I mentioned no no loss more than single dig low single digits but of course uh and I decided to stick to that which was ex which I'm very happy I did because of what happened in Co and what's about to happen coming into covid uh we in this case because we look at economic Mob Models economics models history and and also the human behavior of of participants in the market we felt there was a risk of this coming into more financial issues so didn't predict the of course didn't predict Co but because we look 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 classes then response functions we thought would happen I mean you had spotted there's a disease in China you were looking at what epidemics do in the past so this is long before the kind of first lockdowns in Europe the information was all available on the web just using it to say if this went if this happened how would you structure and size your transactions take advantage of and were there good asymmetric bits whether you use meron shell 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 uh 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 what they did of doing a a trillion dollars of QE in the space of a week re followed by the fiscal uh shock that addition that happened later that did save the market obviously for our point of view we prefer they didn't do anything because we don't made a lot more money uh but I think that that was a bad de overdid it and has probably and has led helped where we're going to happen the next 10 years that drama ification of the action reaction of those decisions after 15 years of QE is probably going to reverberate over the next 10 years so in 2007 you told me there was going to be a financial crash in January 2020 you said uh covid was going to have a pretty devastating effect so what's next so you have I don't I'm sure Three Times Lucky Lucky for your investors but not necessarily for the world what what is the um what's your prediction or your anticipation of what's hen going to happen over the coming years yeah I think over the coming years what we're going to see is that 15year period of zero rates which allowed everyone to buy anything they wanted in any form in any esic 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 is is easy you can pay up you you don't have to worry about liquidity and valuations continue to rise that period is completely been shattered 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 the Target that meant that inflation shortterm 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 of those Central Bank is thinking about how to use models into their own thinking of how to set rates but it means two things one they will on the margin be much more hawkish than they used to be a less trusting of the models and B to ensure that they don't get caught uh 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 um including the C including the private and the public sector not just public sector is going to mean many more issues coming up so I think that what do you mean by more issues more volatility in the markets because the the bailing out or the coming in of the of the central banks if they do come in it will be a much lower level of uh asset prices than we than than they used to so my view is that we're going to have a 5 to 10 year golden period of macr trading more more volatility in in assets and economies including de globalization which we saw William Burns who's the CI of the the the head of the CIA said a couple of months ago that the world's going through a plastic moment he hasn't seen since the Cold War all those things are going to mean opportunities for macr Traders like ourselves globally with different reaction functions so it's a great period for us I I believe coming up in the next 5 10 years and because and I feel Vindicated for not changing our Behavior pattern in that period before so so we're set up I in my view very well for that period by uh looking at structuring sizing models of Trades not not know very low leverage and being flexible so we we're uh we've only got about a minute and a half left I mean I think one of the interesting things having watched your career in the business you've built is that it's gone from being kind of Alan Howard's view of the world and then you you know you double down on that to building a firm where you have lots of Traders lots of views and a multi strategy fund and so brevan Howard is in in some ways sort of bigger than you now um um how do you run that kind of firm it must be quite different from sort of just backing your instincts and you know you've now got lots of people you need to manage how do you manage risk in that in that kind of firm um and what are the future of these kinds of multi strategy hedge funds so we we have uh so firstly I puted I Aon Landy who's my risk manager for 20 years I made him CEO and I allowed him to run the firm he's much better at me than me on doing that as you said and but we have 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 tra I try and train them uh in way I believe is the way to trade some of those the younger ones and then we have a multi-manager multi manager funds as well which uh so we give we give a 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 so it's a that's as that's the way we want to build the company up not to be just one or the other and I think that that allows us also to be flexible to start new funds when we think there's opportunities and finally more and more people based here in Abu Dhabi you can we are going to run out of office space I'm confident sometime early next year so well if there are any property developers in the room you heard it here first thank you very much