Hugh Hendry is killing off his Eclectica Fund after 15 years. Moreover, he predicts that investors won't be willing to back other hedge-fund managers pursuing similar strategies -- just when they might be most needed.
His specialty was global macro. As he describes it, he could take the "pure oxygen" of a leveraged real rate of return on benchmark bonds, earning enough to keep the lights on and pay for highly speculative bets that weren't correlated with global equity markets.
Those days are over, according to Hendry:
"I think we're in the death throes of the global macro hedge-fund entity. Today, I think quantitative easing really has succeeded in killing the global macro community. With a 0.3 percent real return, even leveraging U.S. Treasuries really doesn’t seem a sensible course. And it just doesn't leave enough to cover the costs of running small pools of capital in the global macro area."
His comments on the hedge-fund game, after telling clients he was closing down last week, could be viewed as sour grapes from a guy who was suffering the worst losses of his career this year. He described his returns since 2012 as "mediocre," and the last three months as "harrowing."
But arguably, Hendry's done exactly as he promised over the years by offering his investors -- who presumably already own equities as their main holdings -- a buffer. When stocks rose, Eclectica mostly did poorly. But when stocks got trashed, particularly in 2008, Eclectica's returns acted as a form of insurance.
Being long the dollar versus the yen in a year when the Japanese currency has appreciated by 5 percent against its U.S. peer hurt Hendry's performance. Betting on a rising two-year German yield, which remains stubbornly stuck at -0.70 percent and declined from a June peak of -0.56 percent, was even more costly, contributing almost all of August's 3.8 percent portfolio loss.
Eclectica's underperformance, though, mirrors the lack of returns the global macro strategy generally has delivered in recent years.
In 2009, with the credit crunch starting to inflict damage on the wider economy, he invited the BBC to film a typical day in his life and defended his short-selling as a way to enforce economic discipline. Shortly afterward, I saw him berate a room full of hedge-fund managers for not standing up for their industry.
He was famously combative. "Hello, can I tell you about the real world?" was his 2010 retort to Nobel-prize winning economist Joseph Stiglitz during a televised debate about Greece's ability to pay its debts.
Hendry kicked off last week's goodbye note to clients with a question: "What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in?" The answer, he said, was clear: "The resounding message from my investor base was `absolutely not.'"
Asked on Bloomberg Television on Friday what he'd need to get back into the game, he had this to say:
"The ideal situation would be finding a client base that would be willing to underwrite losses. They'd be saying `I want you to lose at least 5 percent, no more than 10, but 5 percent a year, I think you're doing your job.' That would be a dream."
In the current environment, with the global economy enjoying a coordinated upturn and stock markets marching ever higher, global macro is "a cost center," Hendry said.
But if the world's central banks succeed in driving inflation and interest rates higher, "I fear that we might look back and say `where were all the macro hedge funds?'" he said. With the S&P 500 setting new records, investors aren't buying the kind of insurance that Hendry and other global macro hedge-fund managers are selling. Let's hope that doesn't turn out to be a mistake.