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Hugh Hendry proud to exist outside 'the accepted belief system'

Hugh Hendry proud to exist outside 'the accepted belief system' Ian Fraser

The hedge fund manager Hugh Hendry became something of a media darling in 2008-10. Bouyed after his Eclectica hedge fund gained 31.2% in the crisis-torn year of 2008, the Glaswegian, ex-Baillie Gifford & Co fund manager became a frequent visitor to television studios and was interviewed for several prominent TV programmes about the crisis. In a New York Times profile in July 2010, the paper's London correspondent Julia Werdigier described him as "a plain-spoken Scot, has positioned himself as the public contrarian thinker of this city’s very private hedge fund community."

In a panel discussion about the eurozone debt crisis on BBC2's Newsnight in April 2010 Hendry famously told the leading US economist Joseph Stiglitz: “Um, hello? Can I tell you about the real world?” And, after an appearance on the BBC1’s Question Time, in which the spontaneous Hendry made some unfortunate faux pas, he briefly started "trending" on Twitter, a first for a 'hedgie'.

However his one-man crusade to try and convince a  sceptical British public that financial speculators can be on the side of the angels in a free-market economy was over. It seems investors in Hendry's London-based, Cayman-registered Eclectica Asset Management had a quiet word with Hendry and asked him to turn down the volume a bit (a recent article in the Financial Times, said that "genteel, wealthy investors" in his hedge funds were none too happy with the outspokenness).

Sadly, Hendry, praised as "one of the few independent thinkers and characters left in the [investment] business", went into purdah, at least where broadcast appearances ago. Explaining his new-found reticence Hendry said:

“What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself. The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50m or $75m to and it’s not the same person.”

Hendry, who briefly considered becoming a chartered accountant when studying at Glasgow's Strathclyde University in the late 1980s, added that Paul Taylor, who stepped in as Eclectica as chief executive in January 2011, “came in with provisions that he would accept the role if I cut back on the media thing and made it more professional.”

However Hendry  has not been totally silent. In April 2012, he sent investors his first letter since the winter of 2010 - and it is almost a work of genius.

Zero Hedge wrote: "Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for so long - another must read letter from one of the true (if completely unsung) visionary investors of our time."

In the letter Hendry predicted “financial anarchy” and explained how his investment approach differs from his peers.

"The question now is just how we can make money in the tough business of global macro investing this year ... my weapons are irony and paradox. The joy of life is partly in the strange and unexpected. It is in the constant exclamation 'Who would have thought it?' "

He then reflected on some of the crazy and bizarre things that are going on in the world right now and speculated that French philosopher Albert Camus has inadvertently provided three key principles for successful macro investing:

"Why did ten year treasuries yield 14% under ... Volker but yield just 1.8% under ... Bernanke? Why does France in 2012 flirt with ... electing a socialist president intent on reducing the retirement age, imposing a top rate of tax of 75% and increasing the size of the public sector? Why do we hang on the every word of elected politicians when Luxembourg’s prime minister, Jean-Claude, Junker openly admits, "When it becomes serious, you have to lie"?

You cannot make stuff like this up. It is simply too absurd.

That is perhaps a long way of saying that existentialism is alive and well in the 21st century. For, if the last ten years have taught me anything, it must be that ... Camus, in his search for an understanding of the principals of ethics that can shape and form our behaviour, may have ... provided us with three basic principles for macro investing ... God is dead, life is absurd and there are no rules. In other words, you are on your own and you must take ownership of your own destiny.

For me this has always meant being detached from the sell-side community ... I prefer not to engage in their perpetual dialogue of determining where the “flow" is. I cannot be reached by telephone. I suspect that I am one of the few CIOs who does not maintain daily correspondence with investment bankers and their specialist hedge fund sales teams. Not one buddy, not one phone call, not one instant message. I am not seeking that kind of "edge.” Eclectica occupies an area outside the accepted belief system.

I attempt to cultivate my own insights and to recognise the precarious uncertainty of global macro trends. I attempt to observe such things first hand through my extensive travel (I promise no more YouTube videos), and seek to understand their significance by investigating how previous societies coped under similar circumstances ...

...the Fund's 50% return in 2003 was derived from a legitimate but certainly contentious view that China's WTO entry was set to boost the cyclical "old" economy of the West and that fiat hyper-management of the financial economy could propel gold into a super bull market. To think these views were once contentious; plus ça change!"

The FT reported that, at the Milken Institute conference in May, Hendry said that France was a year away from nationalizing its banks and that politicians around the world have yet to face up to the scale of global debt bubble that is now imploding.

“We have reached a profound point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond – and it terrifies them.”

Hendry remains as negative about China as he was three years ago and continues to short-sell the shares of Chinese state-owned firms. He is also using credit default swaps (CDS) to bet against the debt of  highly-geared Japanese companies including Toshiba, which he believes will lose out China's slowdown. He believes the world is less than nine years away from a crash that will present investors with some spectacular investment opportunities .

Bad things are going to happen and I still think the closest analogy is the 1930s.”

The FT suggests Hendry's media silence is doing wonders for his funds' performance. Eclectica Asset Management's $460m flagship fund is up 12.1% over 2011 and has risen by about 3% so far this year. The fund has returned a compound annual growth rate (CAGR) of almost 10% since it was launched in 2002, putting in the most creditable performances in bear markets.

Read Eclectica Asset Management's April 2012 investor letter in full (via Sribd) here: April 2012 TEF Commentary

More on Eclectica Asset Management and hedge funds:

Tags: 1930s , Albert Camus , Baillie Gifford , BBC , CDS , China , credit default swaps , Eclectica Asset Management , economic crisis , eurozone debt crisis , eurozone sovereign debt crisis , financial crisis , Financial Times , global financial crisis , Greece , hedge funds , Hugh Hendry , Joseph Stiglitz , Milken Institute , New York Times , Newsnight , Paul Taylor , sellside , short selling , The New York Times , World Trade Organisation , Zerohedge
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