Hugh Hendry, one of Britain’s highest profile hedge fund managers, has told New Zealand institutional investors his 2013 conversion from a bearish to bullish outlook is starting to pay off.
Speaking to an Auckland audience via Skype from the UK this week, Hendry said his Eclectica hedge fund, which he founded in 2005, was now up 14 to 15 percent this year and is currently one of the 10 best performing hedge funds. It also made an 8 percent return in 2014 after disappointing returns in the two years prior to that. Since Hendry started Eclectica Asset Management in 2002, it has averaged a 9 percent compounded return.
New Zealand-based fund manager NZAM has invested in Hendry’s hedge fund since 2011, attracted to his contrarian investing and colourful style. Like Scottish comedian Billy Connolly, Hendry hails from Glasgow, has a great accent, and loves to tell a story. His fund attracted attention after achieving a 31.2 percent return in 2008 in the depths of the financial crisis. He became a media figure, including a famous appearance on BBC’s Newsnight when he asked Nobel Prize-winning economist Jospeh Stiglitz: “Um, hello? Can I tell you about the real world?”.
This week he told Auckland private investors that the fund’s franchise was “contentious posturing” and that the most contentious thing you can say today is that you are bullish – a posture he adopted in 2013 and which he believes is now paying off.
Hendry says his assets under management fall from more than US$1.5 billion to US$300 million today after he told clients two years ago that he was being forced to leave his bearish outlook behind.
“What that tells me is I am the worst manager of a business you can imagine. It also tells me there is a profound bull market fear, people are just terrified that 2008 is going to repeat itself, that’s it’s going to be Greece, or Chinese collapsing, or Treasury bond yields surging higher.”
The terms bull and bear describe when markets trend upward and downward respectively.
The two last clients to fire him were two large North American pension funds who pulled the plug in October last year. “Since then we’ve made the best part of 40 to 45 percent,” he said. “That’s not to ridicule them. This is a tough, tough business”.
He’s currently investing more of the fund’s risk capital in China although it was set to record its weakest economic growth in years.
He had been concerned about China after making a video he put up on YouTube on the Wuhan property market, which illustrated how spending billions on buildings generated Gross Domestic Product growth but destroyed wealth because the market already had a 20 percent property surplus. That GDP growth objective saw the Chinese stockmarket fall the best part of 80 percent between 2007 and early last year, Hendry said.
He went from being the arch enemy of China to reconsidering its model of growth after being positively surprised in the past 18 months about how it has recalibrated its system.
Instead of putting a brake on domestic household consumption by keeping wages low, not allowing the renminbi to appreciate, and keeping interest rates negative, the Chinese government changed the model, which has seen both the local sharemarket and currency appreciate significantly, and household consumer wealth rise.
“A BMW bought by a Chinese consumer is about 40 percent cheaper now that it was two years ago. The biggest problem facing the world economy is a deficiency of demand. Today we have the prospect that China can be the conduit to being that buyer of last resort, so I’ve become bullish on China.”
Hendry’s fund is betting that Greece will find it too hard to leave the Eurozone. The US Federal Reserve’s decision to lift quantitative easing means it’s a good time to take a long investment position on European and Japanese equities and the US dollar, and short on other currencies, including the Australian dollar, he said.
“As a speculator, if policymakers are saying they’re okay with the dollar rising, I’m okay with it,” he said.
In a recent client newsletter Hendry said over the past five years it was indisputable that mass injections of loose monetary policy had both fuelled asset prices and staved off further crises.
“I am also absolutely persuaded that the global economy remains so fragile that modern monetary interventions are likely to persist, if not accelerate,. They will, therefore, continue to overwhelm all qualitative factors in determining the course for stock prices in the year ahead.”
Eclectica has made its biggest gains when taking contrarian bets on trends. After the tech bubble burst in the early 2000’s, Hendry had invested heavily in gold and commodities and made a 50 per cent return in 2003 . He also made a 50 percent return in October 2008 on treasury bonds after predicting that when the credit crisis occurred central bankers would cut interest rates.
In the investor newsletter, Hendry said there were times as an investor when you have no choice but to behave as though you believe in things that don’t necessarily exist.
“That means being willing to be long in risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgement long and often.”