Hugh Hendry Blames Broken Macro Model as He Shuts Hedge FundBy , , and
Eclectica Fund lost 9.4 percent this year through August
Hendry gained fame by betting against banks during crisis
Hugh Hendry said the macro hedge fund model is broken because it isn’t making enough profit to cover costs and keep investors sweet.
The money manager, known for his provocative statements and contrarian views, is throwing in the towel on his firm after a 15-year run amid mounting losses. He and peers betting on economic trends have been running higher levels of risks to justify their existence and play catch-up with markets that are on a roll, Hendry said in an Bloomberg Television interview.
“It’s a function of economics. The costs of running a hedge fund today, both regulatory and with other commercial considerations, were just too great," Hendry, 48, said in the interview on Friday. “But I died in active combat."
Hendry’s main fund, Eclectica, slumped 9.4 percent this year through August after losing 4 percent in 2016, according to an investor update. The fund managed $30.6 million at the end of August, while the overall macro strategy had $116 million.
“The last three months were harrowing," Hendry said. “To my great, great, great horror, I became deeply correlated to the travails of President Trump’s presidency and of course these geopolitical events, which were sparked off in the Korean peninsula."
Hendry, a combative Scotsman, posted a 31 percent return in 2008 by betting against U.S. and European banks during the global financial crisis. He also garnered attention for his bearish view on China in 2009 when he posted videos on YouTube in which he toured cities and highlighted office buildings that he said had no tenants. Hendry, 48, later turned bullish on the nation, saying that he disagreed with peers including Kyle Bass who contend China will suffer a crisis and major devaluation.
Macro hedge funds have for years posted middling returns. Such funds, which bet on macro-economic events by trading everything from bonds to commodities, have returned on average 2.9 percent this year, according to data compiled by Bloomberg. The hedge fund industry as a whole has returned 6.6 percent.
“It wasn’t supposed to be like this," Hendry said in an investor letter seen by Bloomberg. “It is especially frustrating as nothing much has gone wrong with the economy over the summer."
Hendry joins managers including Eric Mindich, Leland Lim and John Burbank who have shuttered hedge funds this year. About 259 were liquidated in the first quarter, according to Hedge Fund Research Inc. More closed in 2016 than in any year since the financial crisis, the Chicago-based firm said.
The prospect of higher interest rates has made investors start allocating to macro hedge funds again. The money pools raised $13.6 billion in the first seven months of the year, the most by any hedge-fund strategy, according to data compiled by eVestment.
In his closing letter to investors, Hendry lamented that he’ll have to sit out trading around the next downturn, and left investors with one last trade idea: bet on volatility in fixed income. The one-year implied volatility on 10-year swaps has a low cost of entry, he said, because the market is underestimating inflationary pressures that will spur more interest rate increases by the Federal Reserve.
“Fixed-income volatility really has only one direction it can go,” he wrote. It has “overshot to the downside.”
In the television interview, he added another trade idea: shorting two-year German bonds. Labeling them as the most distorted asset class in the world, he said investors were willing to lose 75 basis points a year for security. “You know what, you don’t need that security. It’s the wrong price.”
Hendry was born in Glasgow, close to the notorious Gorbals public-housing district, and sought to escape his poor upbringing by becoming an accountant. He studied the subject at the city’s University of Strathclyde. After graduating, Hendry worked for an Edinburgh-based pension-fund manager and Credit Suisse Group AG. He then worked for hedge-fund manager Crispin Odey.
Despite their divergent backgrounds -- Odey went to private school and Oxford University -- they found a common vocation: profiting from bucking the trend. Hendry set up his Eclectica hedge fund as a side business in 2002 and then parted with Odey three years later.
Hendry said he’s optimistic about the global economy and recommended investors remain long. He said he doesn’t foresee an abrupt rise in interest rates that would interrupt the stock market rally.
“For the first time in an age, all parts of the world are enjoying synchronized economic momentum and I can’t see it ending for some time,” Hendry wrote in the letter.
— With assistance by Kevin Crowley, Jonathan Ferro, and Guy Johnson