Monthly Shareholder Report - September 2014

BH GLOBAL LIMITED

MONTHLY SHAREHOLDER REPORT:SEPTEMBER 2014

YOUR ATTENTION IS DRAWN TO THE DISCLAIMER AT THE END OF THIS DOCUMENT

Administrator:

Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust")

Joint Corporate Brokers:

J.P. Morgan Cazenove

Canaccord Genuity Ltd.

Listings:

London Stock Exchange

(Premium Listing)

NASDAQ Dubai - USD Class (Secondary Listing)

Bermuda Stock Exchange (Secondary Listing)

BH Global Limited ("BHG") is a closed-ended investment company, registered and incorporated in Guernsey on 25 February 2008 (Registration Number: 48555).

With effect from 1 September 2014, BHG changed its investment policy, such that it no longer invests in Brevan Howard Global Opportunities Master Fund Limited ("BHGO") but instead invests all its assets (net of short-term working capital) in Brevan Howard Multi-Strategy Master Fund Limited ("BHMS" or the "Fund") a company also managed by the Manager.

Prior to 1 September 2014, BHGO invested all of its assets, net of cash retained for short-term working capital and efficient portfolio management, in investment funds of which one or more of the Brevan Howard group of affiliated entities is the manager or investment manager.

BHG was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 29 May 2008.

1. As at 30 September 2014 by BHG's administrator, Northern Trust.

Source: Underlying NAV data for the funds in which BHGO invested in prior to 1 September 2014 has been provided by their respective administrators. BHG NAV and NAV per Share data is provided by BHG's administrator, Northern Trust. BHG NAV per Share % Monthly Change calculations are made by BHCM.

BHG NAV data is unaudited and net of all investment management fees and all other fees and expenses payable by BHG. NAV performance is provided for information purposes only. Shares in BHG do not necessarily trade at a price equal to the prevailing NAV per Share.

* Performance is calculated from a base NAV per Share of 10 in each currency. The opening NAV in May 2008 was 9.9 (after deduction of the IPO costs borne by BHG).

Data as at 30 September 2014.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Unaudited Estimates as at 30 September 2014

Source: BHCM

* These estimates are unaudited and have been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund. These estimates are subject to change.

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 BHG by BHCM. 

Q3 Review

With effect from 1 September 2014, BHG changed its investment policy such that it invests all its assets (net of short-term working capital) in BHMS. As a consequence, BHG now has exposure to the direct trading portfolio of BHMS in addition to the same underlying funds BHG had exposure to immediately prior to the change in investment policy.

FX trading was the main positive performance contributor during the quarter. Profits came mainly from long exposure to the USD against a basket of currencies including the EUR, CHF and JPY. There were also gains from long exposure to CNH and CNY. These gains were partly offset by losses in trading selected emerging market currencies such as BRL.

In interest rates, most of the gains were from EUR interest rates trading. The gains were partly offset by losses in USD interest rates trading. Additional gains were made in developed market equities, where long exposure to selected indices generated most of the profits.

BHG benefitted from its underlying exposure to systematic trading, which proved to be the best performing allocation during the quarter. Systematic trading generated gains across all asset classes except for energy. Most of the gains came from long exposure to developed market bond futures and long exposure to the USD against a diversified basket of developed as well as emerging market currencies.

Losses were suffered in commodities trading where both directional long exposures and relative value trading within the energy complex and in metals were detractors. BHG's look through allocation to credit trading generated additional losses during the quarter. Small gains in the ABS/MBS book and agency mortgage trading were offset by credit hedges and selected corporate credit positions.

BHG continued to be active in its discount management activities buying circa $5.3m at an average discount of 9.5% in September.

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

Monthly, quarterly and annual contribution (%) to the performance of BHG USD Shares (net of fees and expenses) by strategy group

Monthly, quarterly and annual figures are calculated by BHCM as at 30 September 2014, based on performance data for each period provided by BHG's administrator, Northern Trust. Figures rounded to two decimal places.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Methodology and Definition of Monthly Contribution to Performance:

Attribution is approximate and has been derived by allocating each underlying trader book 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 BHG, the majority of risk in this category is in rates)

"Rates": developed interest rates markets

"FX": global FX forwards and options

"EMG": global emerging markets

"Equity": global equity markets including indices and other derivatives

"Commodity": liquid commodity futures and options

"Credit": corporate and asset-backed indices, bonds and CDS

"Systematic": rules-based futures trading

Quarterly and annual contribution (%) by Underlying Allocation as at 30 September 2014

Note: In February 2014, the board of directors of Brevan Howard Emerging Markets Strategies Master Fund Limited ("BHEMS") determined to return investors' capital. Other underlying allocations defined on page 6.

Source: Brevan Howard, monthly or weekly performance data for funds is provided by the respective administrators. Monthly and weekly performance data is net of all investment management fees and all other fees and expenses payable.

BHG Underlying Investment Exposures as at 30 September 2014* (allocations subject to change):

Source: BHCM; figures rounded to one decimal place. Data may differ from those published for BHMS as BHG may hold cash for short-term working capital purposes.

* Inclusive of subscriptions\redemptions in underlying funds for 30 September 2014.

Note: Brevan Howard Investment Fund II - Macro FX Fund ("BHMFX") was redeemed in November 2013. In February 2014, the board of directors of BHEMS determined to return investors' capital, other underlying allocations defined on page 6.

** Calculated using historical simulation based on a 1 day, 95% confidence interval.

Source: BHCM; figures rounded to the nearest whole number. Data may differ from those published for BHMS as BHG may hold cash for short-term working capital purposes.

Source: Brevan Howard; figures rounded to the nearest whole number.

Monthly Performance Review for BHG

The NAV per share of BHG's USD shares appreciated by 1.56% and the NAV per share of GBP appreciated by 1.85% in September.

There were positive returns from four of the underlying allocations, as detailed below.

* The USD currency class of each fund is used as a proxy for the performance of each of the funds; BHMS also invests in the EUR, GBP and JPY classes of the funds .

Source: Underlying data for the funds in which BHMS invests in is provided by their respective administrators, calculations by BHCM.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Brevan Howard Master Fund Limited ("BHMF")

The NAV per Share of BHMF Class Z USD Shares appreciated by 4.62% (net of fees) in September.

During the month, BHMF profited in FX trading, mainly being long USD versus a basket of currencies. Smaller gains were also made in EUR and USD interest rate trading and in equity trading.

Brevan Howard Asia Master Fund Limited ("BHA")

The NAV per Share of BHA Ordinary USD Shares appreciated by 1.81% (net of fees) in September.

Gains were mostly from FX trading as the US dollar and Chinese renminbi appreciated against a broad range of currencies. Further gains came from the Nikkei as well as trading strategies in the US and several Asian interest rate markets. Small losses were posted in Australian interest rate strategies.

The NAV per Share of BHCC Ordinary USD Shares depreciated by 0.73% (net of fees) in September, which ended a challenging third quarter for fundamental markets and for BHCC. Corporate positions posted losses this month, which were partially offset by gains from mortgage- and asset-backed holdings.

The NAV per Share of BHCS Ordinary USD Shares depreciated by 11.03% (net of fees) in September.

In September, BHCS suffered losses, focused predominately in metals and oil strategies.

The NAV per Share of BHST Class Z USD Shares appreciated by 2.88% (net of fees) in September.

In September, BHST made gains in all sectors with the exception of equity index futures and bond futures.

Brevan Howard Emerging Markets Local Fixed Income Leveraged Master Fund Limited ("BEL")

The NAV per Share of BEL Class A USD Shares depreciated by 3.83% (net of fees) in September.

During September, BEL reduced positioning to very low levels, with a small net long in FX and a net short in emerging markets interest rates. The short foreign exchange positions generated modest gains but these were offset by large losses in a small number of long FX positions and interest rates positions.

Brevan Howard Credit Value Master Fund Limited ("BHCV")

The NAV per Share of BHCV Class Y USD Shares depreciated by 1.01% (net of fees) in September.

Gains in commercial-mortgage backed and other ABS positions were overshadowed by losses in the individual company positions for September, which marked the end of a difficult quarter for the corporate portfolio.

Direct Investment Portfolio ("DIP")

The Direct Investment Portfolio appreciated by 2.95% in September.

The DIP generated gains in EUR IR trading as well as minor gains in USD IR trading. Gains were also made in FX through short exposure to JPY, EUR and CHF versus USD. Minor gains were made in tactical equity index trading and agency mortgage trading.

Manager's Market Review and Outlook

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

Market Commentary

US

Growth appears to be running at an annualised rate of approximately 4% through the middle two quarters of the year. Part of that strength represents a rebound from the pothole in the first quarter, so a more sustainable pace looks to be around 3% over the coming year. Compared with fundamentals, consumption is a little more tepid than expected, although auto sales are robust. By contrast, business investment is a little firmer than anticipated. Housing is mixed - construction and sales are slowly trending up, but house prices have flattened out. The biggest downside risk to the expansion is the external sector, where the news has been almost uniformly bad.

The labour market got back on track in September. Payrolls rose at a brisk pace and prior month's moderate gains were revised up noticeably. The unemployment rate dropped below the psychologically important 6% threshold to 5.9%. Over the last year, the unemployment rate has declined a significant 1.3 percentage points which is a faster rate of decline than seen in either of the prior two business cycles dating back 25 years. Broader measures of labour market underutilisation have fallen even faster, although such levels are still high by historical standards. The bottom line is that the economy is getting closer to full employment, but still has significant slack because the recession was so deep.

Market developments point to risks from the external sector and weak inflation. The exchange value of the US dollar appreciated significantly last month, oil and other commodity prices plummeted, and market-based measures of inflation compensations moved down into the low end of the range seen in the last decade. These trends suggest the global economy faces significant disinflationary forces which may have an impact on domestic US inflation, which is already below 2%. These trends merit close attention going forward as they may be an unexpected vulnerability.

In the inter-meeting period, US Federal Reserve officials reinforced the wait-and-see message from the last meeting. The next two meetings are expected to be more interesting as the economy's strength forces them to communicate their plan for policy normalisation.

EMU

Reflecting the ongoing loss of momentum in the euro area economy, German industrial production fell in August by a large -4.0% m/m on the back of a downward revised increase in July. Although the large monthly fluctuations can be largely attributed to calendar effects and production can be expected to rebound again meaningfully in September, the underlying trend in the German industrial production is turning negative, consistent with the weak business sentiment indicators. Amongst factors affecting sentiment and orders is the deterioration of demand in main destination markets for German products, from Italy, to France, China and Eastern Europe. Indeed, the crisis in Russia/Ukraine is affecting Germany proportionally harder than the other major economies in EMU. At the EMU level, both the manufacturing and the services PMIs were revised down in their final release, leaving the EMU Composite PMI at 52.0 in September, down -0.5pt from August. Also, the EMU retail PMI, from 49.4 to a low 47.1, signalling that domestic demand is weakening too. On the inflation front, EMU HICP inflation fell from 0.4% y/y to the cyclical low of 0.3% y/y, with core inflation dropping from 0.9% y/y to 0.7% y/y. Meanwhile, inflation expectations continued to slip in the medium-term horizon, putting pressure on the ECB to keep its activist policy stance going. The 10yr breakeven inflation has declined to 1.46% and 5yr breakeven inflation to 1.03%, while 5yr5yr forward breakeven inflation has moved down to 1.89%. Both the 10yr spot and 5yr5yr forward breakeven inflation rates are now at their all-time lows. Deterioration in inflation expectations is also evident in survey data: according to the European Commission's Economic Sentiment Indicator, consumers sharply lowered their expectations of inflation 12 months ahead, while reporting that they had experienced lower inflation over the last 12 months. Similarly, companies lowered their selling price expectations in the manufacturing and retail sectors.

The annual growth rate of broad money supply M3 has continued to recover. An improvement in the monthly money and credit flows earlier in the year is now translating into higher y/y numbers. However, net lending to households and non-financial corporations has remained broadly unchanged. The underlying trend therefore remains weak, although continues to improve slowly. As a result, the credit impulse is in positive territory. The ECB's October policy meeting kept the language of the introductory statement virtually unchanged from the previous statement. As had been announced, the ECB communicated the broad outlines of its ABS and covered bond purchase programmes. The modalities were even more generous than had been anticipated, allowing, for example, the ECB to purchase up to 70% of individual securities issuances as opposed to maximum 30% in the old covered bond purchase programmes. The rating criteria were also adjusted to allow for purchases of assets from Greece and Cyprus. President Draghi stressed that the potential universe for the ABS and covered bond purchases programme was up to €1 trillion over the two years' horizon that the programme is expected to last, adding that on top of this would come the impact of the TLTROs. Draghi repeated that the ECB stood ready to take further measures if needed. This could become topical if the ECB concluded that either the measures taken are insufficient to achieve the desired balance sheet expansion or if a weaker macroeconomic and price environment suggests that the amounts needed exceed €1 trillion.

UK

Over the past month there has been further evidence of a slowing in UK growth momentum, especially in the housing market which is likely to have knock-on effects on growth in the coming quarters. Manufacturing seems to have stalled, while services and construction continue to hold up. The 10% FX appreciation over the past year and a half, as well as the renewed slowing in Eurozone growth seem to be taking a toll. Housing market activity has been slowing for several months, and with the usual lag, there is now also a reduction in price dynamics. Average prices for the whole country are approximately stagnating now, after a period of 10% annualised growth. Prices in London are already falling. The main cause of the housing market slowdown seems to be the macro-prudential tightening by the Bank of England earlier in the year. This has had a larger effect than intended, as banks seem to have tightened conditions to remain well inside the BoE's guidance. Fear of future property tax changes are also acting as a drag on the housing market. The labour market continues to show a puzzling mix of very rapid declines in the unemployment rate, but also very weak wage growth. The unemployment rate is likely to fall below 6% in the coming months, once again falling even faster than the BoE's forecast. But against that, wage growth remains very weak, and shows little sign of picking up, therefore disappointing the BoE's forecast. Moreover, there are some early signs that employment growth is starting to slow, a development that is expected to continue in response to an overall slowdown in economic growth.

A backdrop of slowing growth and rapidly falling unemployment but weak wage growth does not require urgent rate hikes. While the BoE seemed to have contemplated the possibility of a November hike at some point in early summer, the policy debate has evolved towards hiking in February or later, rather than earlier. Much will depend on the evolution of overall growth and wage inflation in the coming months. A sufficient disappointment on this front could still push the first rate hike beyond the May election. Even if the first hike does take place in February, the subsequent hiking pace is likely to be very slow. 

Japan

As was widely expected, the Bank of Japan (BoJ) wrapped up its October monetary policy meeting leaving policy unchanged. Importantly, Governor Kuroda repeated his argument that the core CPI will reaccelerate towards 2% in the second half of the year and that the BoJ's intention to achieve the 2% price stability target in about two years has not changed. The latter affirmation is in response to a public discussion, including other members of the Board of the BoJ, that the BoJ should relax the timeframe to reach the target. Governor Kuroda is in a tough position. On the one hand, the BoJ likely overrates its ability to control inflation dynamics. The BoJ's forecast is that as the effects of the prior yen depreciation wears off, typical Phillips-curve effects would take up the baton of re-inflation. That recipe always came with one part hope as Phillips curves everywhere are practically flat; it's more difficult now given the obvious hit to the economy from the consumption tax hike. Indeed, the BoJ took note of the recent slowdown in industrial production. In addition, energy prices were a tailwind to re-inflation; they are now a headwind given falling oil prices. Finally, while the recent yen depreciation is expected to help to a degree, the volume of politically-inspired complaints over yen weakness has turned up.

On the other hand, it is likely to be the case that the original promise to reach 2% inflation in about two years' time has been an important impetus in pushing inflation up. Consumer inflation expectations have risen, even though that improvement has stalled in the last half year. The pass-through of the previous yen drop into domestic prices also seemed stronger than over previous episodes. A relaxation in the BoJ's timeframe runs the risk of undoing some of the change in expectations that it has accomplished to date. At the same time, commitment towards structural reform has weakened. While Prime Minister Abe reiterated his support for the Trans-Pacific Partnership in a speech to the National Diet, there is no evidence that he is willing and able to push through the necessary revisions to agricultural tariffs that appear necessary to reach a deal. Meanwhile, recent press reports indicate that the Government is anticipated to delay its decision to shift the Government Pension Investment Fund's portfolio allocations.

Recent readings from surveys of consumer and businesses were uninspiring. The best was the Shoko-Chukin survey of small businesses that improved in August. The Q3 Tankan survey results remained above the waterline but slipped somewhat from the second quarter. The economy watchers survey moved down. Consumer confidence is mired at a level closer to the 2012 average than the optimism seen after Abenomics was introduced. Meanwhile, the latest inflation data disappointed with core inflation declining 0.2% on a seasonally adjusted basis from July to August and western core prices edging down 0.1%.

China

Data has shown a mixed pattern in August and September. In September both the official and the HSBC manufacturing PMI recorded similar readings to August, remaining - though barely - in expansionary territory. In contrast, actual data weakened meaningfully in August, with industrial production slowing from 9% y/y to 6.9% y/y. Credit growth is moderating too. Although total social financing formation recovered in August to RMB957.4bn from the low level of RMB271bn in June, it was still below the consensus (RMB1.1tn). In year-to-date terms, total social financing continues to lag behind the 2013 level by 6.3%. On the external side, China recorded another large trade surplus of US$49.8bn in August, compared with the prior figure of US$47.3bn and a consensus of US$40bn. Exports grew by 9.4% y/y, compared with the prior figure of 14.5% y/y and market expectations of 9%; imports contracted by 2.4% y/y, below market expectations. The data breakdown suggests that weaker imports were driven by both soft commodity prices and sluggish domestic demand. The average monthly trade surplus up to August is US$25bn, which now sits at the high band of previous estimates of US$20-25bn per month for 2014; seasonality will play a favourable role on the trade balance for the remainder of the year.

Policy makers have not signalled any meaningful future policy changes, except some mild easing signals by the PBoC which include: (i) a lower 14-day repo rate, down from 3.7% to 3.5%; (ii) financing of RMB500bn to the largest five banks (reported by the media and unverified by the PBoC); and (iii) easing mortgage policy on first home purchases, by classifying a second home as a first one if the first house's mortgage is fully paid. However these measures may have limited impact on the real economy.

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