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Home > Blogs > Ian Fraser > Hendry's eclectic approach gives pointers to global outlook

Hendry's eclectic approach gives pointers to global outlook

Hugh Hendry | Hendry's eclectic approach gives pointers to global outlook Ian Fraser

The Scots hedge fund manager Hugh Hendry has lately become something of a media darling thanks to his sheer outspoken-ness. But he also puts his clients’ money where his mouth is, often making them handsome returns, and has some genuinely interesting things to say about the outlook for the global economy.

Hugh Hendry founded Eclectica with some fellow refugees from Odey Asset Management in 2005. According to a recent profile piece published in the New York Times, he is a throwback to the 1970s and 1980s, to the heyday of George Soros’s Quantum Fund, when hedge fund managers were free-thinkers who dared to make big macroeconomic bets.

Among Hendry’s current batch of big ideas are that the euro is doomed, that China is headed for a spectacular fall, and that President Barack Obama will fail. On the latter point he memorably told the New York Times:

“If there was a way to short Obama, I would.”

Like Jim Chanos, president and founder of US hedge fund manager Kynikos Associates, Hendry believes a crisis is looming for the Middle Kingdom. He likens the country to the Starbucks chain of coffee shops: very good at rapid growth but less good at capitalizing on that. The main issue, says Hendry, is the country's massive credit bubble and that lending has been channelled into unproductive projects.

He told Bloomberg in June that China's 13.6 trillion yuan ($2 trillion) of new lending since January 2009 eclipses the economies of South Korea, Taiwan and Hong Kong combined and is “unprecedented in 400 years of economic history."

Eclectica's economic commentary from May 2010 included pictures of Chairman Mao and lyrics from the band Gorillaz. However the overall message was that Hendry sees hyperinflation ahead, as Western nations struggle to pay off their massive debts via "worthless fiat currency". However, for this to occur, he argues that we first need to experience a significant deflationary event.

Along with his co-fund manager Espen Baardsen, a former goalkeeper with Tottenham Hotspur, Hendry is devising ways to bet on a Chinese collapse. One is to buy options on some 20 companies in international markets that will profit from “a dramatic collapse” of China’s growth, he told Bloomberg in May.

Eclectica correctly predicted that Greece’s financial travails would harm the market for German bonds. But the hedge fund manager lost money betting on European sovereign debt in the first quarter of 2009.

Hugh Hendry has made some memorable appearances on television. In February 2010 he appeared on BBC Two’s Newsnight alongside Professor Joseph Stiglitz. In a debate about the future of the euro, Hendry cheekily interrupted the Nobel laureate saying: “Hello, can I tell you about the real world?”

He went on to slam Greece as “a cheats’ charter... [which had built up] an unsustainable debt burden” and that the only solution was "forgiveness" of its debt in the shape of a "haircut", or a default or national bankruptcy. The episode became a minor hit on YouTube with some 71,000 viewings so far.

The New York Times said:

His verbal pyrotechnics have won Mr. Hendry a reputation for challenging the economics establishment. He is regarded and appreciated by many as overly pessimistic about, well, just about everything.

What, if anything, is the philosophy that underpins Hendry's approach? He told the US newspaper that one of his biggest inspirations is The Gap In The Curtain, a 1932 novel by John Buchan. He describes this work, which uses time travel to explore whether fate is pre-determined, as “the best investment book ever written”. Importantly he said it taught him to envision the future without neglecting what happened leading up to it, a mistake he argues many investors make.

Eclectica currently has some $450m under management but Hendry said he wants to grow this to $1 billion.

Further reading on the outlook for the global economy



Tags: asset price bubbles , China , European Monetary Union , Greece , hedge funds , inflation
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