Bloomberg Markets Magazine Profiles Hugh Hendry

January 13, 2011

4 minute read

I was an 'early adopter' of Hugh Hendry, highlighting him on these virtual pages before he became fashionable to print within the financial blogosphere. Anyone who is this acerbic (sometimes unfairly so), but in a transparent and honest manner is someone I can get behind. As always, watching a video of Hugh is 50x better than reading anything about him, but for now we are left with a write up - although an in depth one - on the man behind the wit. Some surprises for me was his relative youth (41) and his relative low amount of assets (just over $200M in his flagship fund), especially in relation to the publicity he has received the past 2 years. Then again, secrecy is more treasured in the hedge fund world than in other investment veins where 'talking your book' is not only encouraged, but a standard operating procedure.

There are some investing themes within the article (betting against China rather than Europe because the cost for European bearish bets has skyrocketed), and some explanation for a relatively poor 2010. Since there is no real way to bet against Chinese stocks within the country he has an interesting strategy. Whatever the case he is a real "hedge" fund manager, unlike the hordes of American beta chasing leveraged mutual funds masquerading as hedge funds - but exposed as nothing of the like in 2008.

Some highlights from the Bloomberg article:

Provocative statements and aggressive positions are Hendry hallmarks. The 41-year-old fund manager says he’s proud to have profited from trading interest-rate options after the near collapse of the European and U.S. banking systems. His chaos play triggered a public spat with European Union lawmaker Poul Nyrup Rasmussen, a former Danish prime minister, who is driving efforts to regulate hedge funds. The fund manager dismissed Rasmussen as one of Europe’s “champagne socialists” determined to penalize success.
“The truth today has become unpalatable, and these jokers don’t want to hear it,” Hendry said in a riposte to Rasmussen, who is president of the Party of European Socialists. “They are now afraid because the magnitude of the problem confronting Greece is now greater than these guys and their ability to respond to it.”
Hendry’s Eclectica Fund, which bets on broad global macroeconomic indicators, gained the notice of investors in 2008 when it posted a 31.2 percent return, in a year when the Standard & Poor’s 500 Index dropped 38.5 percent. As of Nov. 30, 2010, the $233 million Eclectica Fund had climbed 119.3 percent since its inception in 2002.
“It’s not our year (2010); nothing profoundly bad has happened,” said Hendry in mid-December, projecting that his total 2010 gain would be about 5 percent.
Hendry isn’t always right. In 2006 and 2007, before the financial crisis, his flagship hedge fund underperformed the HFRX Macro Index, a benchmark of rival funds. (was he wrong? or just early?) In 2009, when funds tracking the S&P 500 returned about 23 percent, Hendry lost 8 percent -- his worst performance since the fund’s inception.
Hendry isn’t always right. In 2006 and 2007, before the financial crisis, his flagship hedge fund underperformed the HFRX Macro Index, a benchmark of rival funds. In 2009, when funds tracking the S&P 500 returned about 23 percent, Hendry lost 8 percent -- his worst performance since the fund’s inception.
“In a way, he’s real hedge material,” says Jacob Schmidt...... “Hedge-fund material should not be mainstream -- it should be different. That explains his performance. In difficult markets, you’re getting fantastic performance. In good markets, you might get disappointing performance.”
Now, Hendry is focusing his rhetoric -- and investing strategy -- on a bigger target: China. He’s betting that growth in the world’s No. 2 economy will collapse because of rampant real-estate speculation, sending shock waves through Asia and beyond.
The problem, Hendry says, is that China’s gross domestic product growth isn’t matched by wealth creation at home. In his doom-laden scenario, a plunge in Chinese stock prices and property values will be exacerbated by a softening demand for the country’s exports, triggering an extended period of global deflation and slower growth.
Hendry, a combative Scotsman, is betting against China in an unusual way, by snapping up credit-default-swap protection on bonds issued by Japanese industrial companies, which have benefited from China’s construction boom. Hendry is convinced that Japanese banks are selling such protection too cheaply. If the Japanese corporate bond CDS spreads widen to equal or surpass their record highs of 2009, Hendry’s fund could rise by as much as 50 percent, he says.
Hendry’s bets on Japan have a time horizon of between two and five years, indicating that he expects China to crash sometime before 2015.
Having ridden Europe's sovereign-debt crisis in early 2010, Hendry says he won’t be joining the speculators seeking to profit from the euro’s current troubles. “Because the euro problem is known, the cost of insuring against it is very high,” he says. “If I defray into Asia, I think I’m buying something very similar but at 80 to 90 percent less. If it all goes belly up, I’m going to make 50 percent.”