BH Macro GBP Regulatory News (BHMG)

Source: BHCM

* This data is unaudited and has been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund. The relative size of each category is subject to change. Sum may not total 100% due to rounding.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets.

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

At NAV: This represents the level of assets in the portfolio that are invested in other Brevan Howard funds and priced or valued at NAV.

Source: BHCM

* This data reflects the combined ASC 820 levels of the Fund and the underlying allocations in which the Fund is invested, proportional to each of the underlying allocation’s weighting in the Fund’s portfolio. The data is unaudited and has been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund and any underlying funds (as the case may be). The relative size of each category is subject to change. Sum may not total 100% due to rounding.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets.

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

The information in this section has been provided to BHM by BHCM.

Gains in September from directional trading of U.S. interest rates were largely offset by losses from European government bond trading. Further modest gains were generated by directional and volatility trading strategies in FX, while small losses were generated by equity and credit index trading strategies.

The performance review and attributions are derived from data calculated by BHCM, based on total performance data for each period provided by the Fund’s administrator (IFS) and risk data provided by BHCM, as at 28 September 2018.

Performance by Asset Class

Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class as at 28 September 2018

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Methodology and Definition of Contribution to Performance:

Attribution by asset class is produced at the instrument level, with adjustments made based on risk estimates.

The above asset classes are categorised as follows:

“Rates”: interest rates markets “FX”: FX forwards and options “Commodity”: commodity futures and options “Credit”: corporate and asset-backed indices, bonds and CDS

“Equity”: equity markets including indices and other derivatives

Performance by Strategy Group

Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group as at 28 September 2018

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Methodology and Definition of Contribution to Performance:

Strategy Group attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.

The above strategies are categorised as follows:

“Macro”: multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates)

“Systematic”: rules-based futures trading

“Rates”: developed interest rates markets

“FX”: global FX forwards and options

“Equity”: global equity markets including indices and other derivatives

“Credit”: corporate and asset-backed indices, bonds and CDS

“EMG”: global emerging markets

“Commodity”: liquid commodity futures and options

The information in this section has been provided to BHM by BHCM

US

The historically strong labour market displayed continued momentum in September. The unemployment rate dropped to a nearly 50-year low of 3.7% and headline job gains were strong on average over the last three months. After having languished for most of the business cycle, wage gains are picking up, with average hourly earnings rising at an annual rate of 3% so far this year.

Growth in Q3 was solid, tracking above 3% at an annual rate. Consumption spending is solid and business investment is well-maintained. Housing is a relatively weak spot and we believe that this will probably move sideways at best, as mortgage rates have risen by 50bps over the last few months. Trade and inventory investment are shifting around the headline GDP number, but we believe that smoothing through the volatility should add to growth in the coming quarters.

Inflation disappointed in September. Core consumer prices rose by 0.1% for the second month in a row. We believe that some of this disappointment owed to a technical distortion in seasonally adjusted used car prices. Nevertheless, the Federal Reserve’s (“Fed”) preferred measure of inflation, the core personal consumption expenditures index, remained at 2% over the last year.

Monetary policy appears to be on autopilot with the economy operating above its long-run sustainable pace and inflation near the Fed’s target. Although the neutral interest rate is uncertain, most policy makers point to a narrow range between 2.75% to 3.0%, which is still a few rate hikes away, even after September’s increase. It is our belief that President Trump’s unprecedented attacks on the Fed will probably make the near-term path of rate hikes more certain. Elsewhere in Washington, the US, Mexico and Canada agreed to refresh the North American Free Trade Agreement (“NAFTA”) with a new name, the United States-Mexico-Canada Agreement (“USMCA”), and some tweaks around the edges.

UK

Economic activity in the UK has continued to grow at a moderate pace and we believe that this was likely supported by temporary factors in the most recent quarter. However, the uncertainty around Brexit, and the moderation of activity in Europe may pose some challenges. According to the Office for National Statistics, the economy grew by 0.7% 3m/3m in August, still supported by robust growth within the services sector, which contributed 0.45ppts. A rebound in construction activity contributed around 0.15ppts, after having been a 0.2ppt drag previously. Industrial output has also improved of late, adding another 0.1ppts to growth over the past three months. Currently, GDP is expected to grow at 0.6% q/q in Q3, up from the 0.4% seen in Q2. However, in our view growth in Q3 was likely supported by temporary factors including inventory building ahead of Brexit, as well as improved consumer sentiment due to the World Cup. Looking ahead, business sentiment within the manufacturing sector rose in September, but only after moderating markedly over the year, reflecting, in our view, both a slow-down in activity in Europe, as well as increased uncertainty around the prospects of a no-deal Brexit. Business sentiment for the services industry (which accounts for approximately 80% of the economy) continues to move sideways. Should business sentiment continue to hold, it is our belief that GDP should continue to grow at an average pace of around 0.4% q/q going forward, which should be enough to absorb the little remaining slack in the economy. Meanwhile, the unemployment rate continues to make new multi-decade lows, recording 4.0% in July (unchanged from the previous month), and jointly the lowest rate since 1975. We believe that robust employment should support consumption; for example, although retail sales fell 0.75% in September, over the year they are growing at a pace of 3.2% y/y, up from the lows of 1.0% last year. However, we believe that the softness in the housing market may still act as a drag; house price growth remains positive at the national level, but activity indicators remain modest. Moreover, we believe that tighter conditions around consumer lending may also act as a headwind to consumption. Overall, the tightness in the labour market should continue to put upward pressure on wage growth. Excluding bonuses, wage growth is averaging a pace of 3.1% 3m/12m in August, making a new post-crisis high. Wage pressure should, in our view, in turn cause inflation to pick up. Most recently, headline inflation fell by 0.2ppts to 2.4% y/y in September whilst core inflation fell by 0.2ppts to 1.9% y/y, partially unwinding the 0.3ppts jump in the previous month.

The combination of moderate activity, a tight labour market, and building wage pressure has, in our view, caused the Bank of England to project inflation to remain above 2% for most of the projection horizon. It was in this light that the Monetary Policy Committee (“MPC”) voted unanimously to raise the official bank rate by 0.25ppts to 0.75% in August. Following this, the MPC voted to keep the policy rate unchanged at the September meeting. The minutes had highlighted the further improvements made in the labour market and the MPC revised up its Q3 GDP forecast by 0.1ppts to 0.5% q/q, however it also highlighted the increased concern among businesses around the prospects of a ‘no-deal’ Brexit, as well as the moderation in external growth. The key messaging from the MPC’s statement was left broadly unchanged: “were the economy to continue to develop broadly in line with [the Bank’s] Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”

The state of the Brexit negotiations remains a key risk to the economic outlook. Relationships between the EU and the UK seem to have improved since the Salzburg meeting. In a recent interview the EU Commission President Jean Claude Juncker noted that “the potential for rapprochement between both sides has increased in recent days”, and was optimistic that a deal would be reached by November. The main difficulty around the withdrawal bill, which if agreed would ensure a transition period, is still centered on the Irish border; both parties wish to avoid a hard border in Ireland. In order to do so, the EU has proposed a backstop to keep Northern Ireland within the Customs Union and large parts of the market, effectively putting a border between Northern Ireland and Great Britain. However, such a proposal would divide the UK from the UK’s perspective. It is also unclear whether such a proposal would get a parliamentary majority, given the Democratic Unionist Party’s opposition to an ‘Irish Sea Border’. Regardless, at this stage, there does not appear to be a parliamentary majority for any single brand of Brexit.

EMU

The EMU Composite Purchasing Managers' Index (“PMI”) fell in September, which is a further blow to the recovery envisaged by both the consensus and European Central Bank (“ECB”). Not only was the Composite PMI on average lower in Q3 than in Q2, but it also ended the quarter on a softer note, thus raising the risk of further disappointment in Q4. Although industrial production (“IP”) increased by 1% m/m in August, so far in Q3 the level of IP remains 0.2% below the Q2 average. Regarding consumer prices, headline Harmonised Index of Consumer Prices (“HICP”) inflation edged up to 2.07% y/y in September, from 2.03% in August. Core inflation fell from 0.94% in August to 0.91% in September, the lowest level since April. In our view, core inflation remains at a level that is quite troubling from an ECB perspective, and is already threatening the ECB’s staff forecast of 1.1% for 2018. There are still no signs of the “relatively vigorous” pickup in underlying inflation that President Mario Draghi highlighted before the European Parliament’s Economic and Monetary Affairs Committee, the predicted effects of which are contained within the ECB forecast. In fact, we believe that core inflation continues to show that no meaningful convergence is in place towards the ECB’s definition of price stability.

After having halved the pace of monthly net purchases of bonds to €15bn from October to December, current activity and core inflation trends in the EMU economy make it difficult, in our view, to justify the ECB’s decision to, subject to conditions, end net quantitative easing (“QE”) purchases in December on economic grounds. However, the bar to change the decision appears quite high. As such, next year the fine tuning of monetary policy for the achievement of the price target will, in our view, depend solely on the decision concerning interest rates and forward guidance. Currently the Governing Council expect the key interest rates to remain at their present levels, at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels in line with its aim.

Japan

Prime Minister Abe reaffirmed the government’s intention to raise the consumption tax by two percentage points in October 2019. At the same time, he instructed the government to explore ways to ameliorate the boom-bust effects of households front-running their spending on the economy. In our view, there is not much that the Bank of Japan can reasonably do. Given that the boom comes first, it is unlikely that Governor of the Bank of Japan Kuroda will want monetary conditions to tighten until Japan passes through the downside of raising taxes. Two lessons from past hikes are relevant. First, that such efforts are unlikely to get the timing right and, in our view, will likely be ineffective. Second, that the government’s forecast typically underestimates the downturn.

Economic activity data have not changed much of late. In the last Tankan Survey a few more indices ticked down than ticked up, but changes were small and overall levels were fine. Industrial production and the Economy Watchers survey have generally moved sideways of late. The Markit manufacturing index has been little changed in the last few months after moving down slightly from the start of the year.

Inflation data have been a little more interesting. National prices, excluding all food and energy prices, rose 0.2% on a seasonally adjusted basis in August, following a 0.1% gain in July. It is still 0.1 percentage point below the level seen six months ago, so it would be a stretch to claim that the reinflation project is back on track, but the progress is encouraging. Tokyo western core prices were flat in September after rising, like the national index did, in July and August, maintaining the recent increase.

Inflation fundamentals are mixed. The Cabinet Office estimates that GDP is running 0.5% above potential. So far this year, inflation expectations are up only slightly. The yen-dollar rate made a round trip in the past month and is at a level not far from the summer average, close enough to not pressure inflation one way or another.

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

bhfa@ntrs.com

+44 (0) 1481 745736