Eclectica's Hendry Turns Greece Profit Into China Failure Wager
Hugh Hendry is a man worried about the future. Although the hedge-fund manager beat more than 80 percent of his peer group rivals in 2010, Hendry laments that he’s part of an oppressed minority -- and likens the threat of hedge-fund regulation to the plight of the Roma migrants expelled from France last summer by President Nicolas Sarkozy.
“Social mood is hardening, changing, deteriorating: We see that not just in hedge funds; we see that in the very polite, previously libertarian societies,” says Hendry, dressed in an open-necked gray shirt and light-blue linen jacket at his Eclectica Asset Management LLP in London. “Hedge funds are a minority. Guess who else is a minority? People from overseas.”
Hendry, gesturing for emphasis, is just getting started on his defense of the downtrodden, Bloomberg Markets magazine reports in its February issue.
“My little French friend Sarkozy, he’s picked on the Roma gypsies, the minorities,” he says. “This is the beginning of a movement, which, if left unchecked, has very worrisome implications.”
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.
“Mr. Hendry, you can say farewell,” Rasmussen said in a U.K. television debate on the Greek sovereign-debt crisis in March 2010. “We are going to stop your attacks on ordinary people.”
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. Hendry’s fund was up 9.6 percent for the year to Oct. 31, besting 83 percent of its rivals in the annual Bloomberg Markets ranking of global macro hedge funds. (Hendry’s fund wasn’t big enough to be included in the rankings for mid-sized funds.) As of Nov. 30, 2010, the $233 million Eclectica Fund had climbed 119.3 percent since its inception in 2002.
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 such as JFE Holdings Inc. and Nippon Steel Corp., which have benefited from China’s construction boom. Hendry is convinced that Japanese banks are selling such protection too cheaply. Nippon Steel CDSs, for example, cost 57.25 basis points on Jan. 7, about a quarter of their high of 215 basis points on Feb. 17, 2009. (A basis point is 0.01 percentage point.)
“I see Japan as a nuclear bomb strapped onto the chest of the global economy,” Hendry says. “They’ve got uranium -- which is, they sell credit protection: CDSs. I’m the other side of that.” 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.
A slump in the price of Japanese bank shares shows that Hendry may be on to something. The Topix Banks Index, which tracks Japanese banks, sank on Nov. 1 to its lowest level since at least 1983, when Bloomberg first tracked the data, as demand for loans dropped in a sluggish economy. The index has trailed the benchmark MSCI World Bank Index since mid-2009.
Hendry promoted his downbeat view on China by traveling to that country’s major cities with a video camera in the spring of 2009. His report, in which he pointed out numerous empty skyscrapers, has been viewed nearly 100,000 times on YouTube.com.
Anthony Bolton, the U.K. money manager who started the Fidelity China Special Situations Fund in April 2010, says he isn’t losing any sleep over Hendry’s dire predictions.
“I am not sure it is going to be all plain sailing in China,” says Bolton, whose fund’s share price climbed 16.3 percent from its inception to Jan. 7. “Hugh Hendry is worried about the bad debts from local governments and bad debts from other areas and the fact that some of the infrastructure spend is going into projects that won’t see a return for many years. These are all challenges, but I don’t think they overweigh the bull points.” Bolton says his fund’s performance is driven by underpriced small- and medium-sized Chinese companies that will benefit from a shift toward domestic consumption.
Profiting From Disaster
Hendry has a track record of profiting from disaster with Eclectica, which bets on trends such as currency swings and interest-rate movements. One of Hendry’s major trades in 2010 was to purchase options on interest-rate swaps that bet on the future course of the Bank of England’s benchmark lending rate. The value of those contracts should rise if the market expects that the central bank will keep borrowing costs at or near historic lows.
Those positions helped Eclectica gain 15.3 percent in 2010 through Aug. 31, ranking it No. 8 among 235 global macro funds in that period, according to data compiled by Bloomberg.
Hendry’s interest-rate positions became less attractive near year-end, when the market bet that rate rises were more likely after the U.S. Federal Reserve initiated a second round of quantitative easing and inflation rose in Britain. “It’s not our year; 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. 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, although the HFRX Index fell 8.8 percent in the same period.
“In a way, he’s real hedge material,” says Jacob Schmidt, CEO and founder of London-based Schmidt Research Partners Ltd. “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.”
The son of a truck-driver father and a mother who worked as a secretary, Hendry was born on the south side of Glasgow, close to the notorious Gorbals public housing district. Hendry planned to escape his poor upbringing by becoming an accountant and studied the subject at the city’s University of Strathclyde.
Upon graduation, Hendry spent eight years working as an analyst for Baillie Gifford & Co., an Edinburgh-based pension fund manager. He moved to London in 1998 after getting a job as an equities analyst with Credit Suisse Group AG. A year later, he met Crispin Odey, who ran his own hedge fund in London’s Mayfair neighborhood.
Bucking the Herd
The two made for an odd pair. The pinstripe-wearing Odey went to Harrow School, which counts Winston Churchill among its alumni, and was a graduate of the University of Oxford’s Christ Church College. The state-educated Hendry shuns ties and often wears khakis. Yet, together they found a common avocation: profiting from bucking the herd.
“He taught me how to manage money,” Hendry says of Odey. “More than that, he taught me how to misbehave. Misbehavior is all about curiosity, how you invoke and think about change, which is very necessary in the management of money.” In 2002, Hendry set up his Eclectica hedge fund as a side business. He parted company with Odey in 2005.
“For the last five years, I’ve been working with myself,” Hendry says in a September interview. “I don’t think anyone else would choose to work with me.”
He drives a G-Wiz electric car to his loft-style office in Bayswater, a district of small shops and cheap tourist hotels 2 miles (3 kilometers) from Mayfair.
Hendry turned bearish on the euro following the Irish government’s pledge on Sept. 30, 2008, to guarantee the debt of domestic banks. His fund later took positions correctly anticipating a drop in the euro’s value against rival currencies such as the Australian dollar and the yen.
In March 2009, Hendry tangled at a London debate with Liam Halligan, chief economist at Prosperity Capital Management UK Ltd., who argued that Bank of England pump priming would trigger inflation in Britain.
“I know that your head is firmly lodged somewhere,” Hendry said, asserting that the U.K. was entering a period of deflation.
Since then, the U.K. consumer price index has remained above the Bank of England’s 2 percent target, supporting Halligan’s view that inflation was on the rise.
“Hugh is very smart and is always worth listening to -- even when he turns out to be wrong,” Halligan says. Hendry frequently airs his opinions on British TV, where he has tangled with the likes of Nobel economic laureate Joseph Stiglitz and Rasmussen.
In February 2010, Stiglitz predicted on the British Broadcasting Corp.’s Newsnight program that the major European countries would calm market concerns about a Greek default by standing behind the country.
“Hello?” Hendry replied. “Can I tell you about the real world?”
A month later, in his televised clash with Rasmussen, Hendry dismissed European lawmakers who want to regulate hedge funds and private equity firms.
“Now they have to apportion blame elsewhere,” Hendry said. “I am a convenient scapegoat for Greece breaking all of the rules.” The euro lost 9 percent in 2010 against a basket of currencies of its major trading partners.
Hendry’s resolute defense of profiteering at a time of crisis still angers Rasmussen.
“Hedge fund managers need to look outside that 20th-floor window and see that impact they can have on ordinary people’s lives,” he says. “Being allowed to openly speculate on a sovereign state’s weakness only accelerates that weakness.”
Schmidt says Hendry’s big mouth may scare away potential investors and is one explanation why Hendry now manages about $500 million across three funds -- about half of the money he handled for Odey.
“To some extent, the public profile does not help him,” Schmidt says, noting that Hendry’s performances on TV can reveal his trading positions.
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. Hendry says investors who have been dazzled by China’s economic growth ignore the country’s problems in creating individual wealth.
Veteran investors in Asia disagree with Hendry’s gloomy analysis.
“It may be a painful adjustment, but in the near term there is no danger of an implosion in China,” says Marc Faber, the Hong Kong-based investment adviser and fund manager who publishes the Gloom, Boom & Doom report. “If I was negative about China and the credit implosion in China, I would short the Chinese banks.”
Hendry says he avoids direct bets on Chinese lenders because of the potential for unlimited losses. He favors trading options in the credit markets where his downside is limited to the premium he pays for holding an option. Hendry says his positions will result in no more than a 15 percent loss for his fund if they go sour.
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.”
And if it somehow comes out fine, Hendry will be ready to turn his attention to some other part of the world where the lurch toward chaos offers an outspoken fund manager a chance to make a profit.
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