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We’ve heard plenty of fund managers blame the macro environment and the lack of a definitive economic trend for the drought in returns over recent years, but in his latest blast, famed – or perhaps infamous – contrarian Hugh Hendry hold his hands up, admitting his shortcomings and his own losses.
"I fear that our community has overloaded on top of the trend a normative value judgment about how the world is being organized by monetary authorities," Hendry told Hugh H in an exclusive interview published on Friday. “And the view is rather prejudicial: [our community] doesn't like it. And I posted a letter saying, we're dying on the year and we do not blame monetary policy.”
Hendry adds that there have been some outstanding trends in the last few years which he and other major players have missed out on, such as the CNH float in China, which went from 2009 to the first quarter of 2014. “An immense trade, which no-one participated in” Hendry said. He’s also reinvigorated by the “intellectual car crash” that was the Brexit vote, which allowed a reassignment of probabilities for questioning the euro, in what Hendry is calling an immensely interesting time for macro.
Speaking at length in an another discussion with Real Vision TV and Raoul Pal, Hendry said Brexit really offers the chance to escape the confined trajectory contributing to the perceived malaise in the sector over the past four years. The probability of the euro state reneging with 28 members was one thing, with strong forces holding them together, he said, but now there are 27 it’s quite another.
One to thing to note: since Hendry never spends more than four weeks in the same place, (he prefers to test his engagement with the feel of different time zones) the guys at RealVision can be commended for at least getting him to sit still for just over an hour for this interview.
There is more in the full Real Vision video, including his current positions on Mexico bonds, although some of the highlights are captured in the clip above. But it was the “intellectual travesty of Brexit” and an inability to see it coming that really got Hendry animated. He’s focused on the upcoming Italian constitutional referendum and he’s also quite taken with the volatile political picture in Paris, in particular, the likelihood of the president not being endorsed by his party to run again for the first time and France seen as the next candidate for the exit. Hendry explains how he’s going to make money from the discord, investing in the spread between German over Italian BTPs.
“We know that back in 2011, where the market began to associate a non-tail-like probability to the system exploding, that spread blew out to 600 basis points. And then the effectiveness of Draghi brought that into 100 basis points and Draghi has continued to deliver.
“We've crossed the rubicon with quantitative ease. And we've increased it both in scale and in time. And stubbornly, we haven't passed the 100 mark, that there seems to be a fundamental qualitative level where participants go, it's too rich for me at that level.
“So it feels– and we'll see. Time will test this. It feels a bounded floor. And I would say that each 10% change in probability– like adding a 10% probability of a member country leaving and emulating the UK– I think adds 100 basis points to that spread.
“So if we were to travel over the next 12 months, and we saw – and I think – actually, I think the most likely candidate for a country leaving would be France. France is like the UK. It's big enough to support itself. There's just great antipathy for the European project. The economy's really, really subdued. They don't like the immigration factor. But of course, as you say, Italy seems more obvious. It doesn't matter.
Reminiscing about the better days, Hendry pointed to the passage of time as pivotal in the macro business. This was key in the success of his famous trade during the GFC – buying swaptions on the difference between two-year and 10-year US Treasury securities in April/May 2007 – Hendry said he was way out of the money before before generating 50% in October 2008.
"Now again, with the mastery and the art of macro, it is so complex that it's not just necessary that you're correct; it is the consequences of being correct. Now, we had a position whereby the other side – the investment banks – they were desperate. They were dying as this thing suddenly came to my strike levels. Blew through my strike levels, started to create this monster of P&L, which was murdered by a monster loss on the other side.
“And so daily we had pleadings. Please, please, please can we remove. So not only had we conceived of a great monster P&L trade the catalyst was adversity. Liquidity came to us, allowing us to monetize and close. That's macro. That's macro.
“… I'm hesitating because who am I to pontificate on the mastery and the skill set of other macro managers? But I feel beholden to say that there is a degree of collective responsibility for an element of the drought in returns. Because there had been some immense macro trends over the last four years.”
Throughout the discussion, Hendry laments the absence of external volatility, as he continues to refer to the passage of time as crucial to the macro journey. Hendry admitted that with external volatility on the floor, he was unable to achieve the double digit returns he set out to achieve in the earlier part of this decade, when he was trying too hard to please institutional investors. An interesting side note: Hendry and Pal clash over the use of stops, which Hendry said he has a personal problem with.
“You come back to life and macro as a journey, not a destination. And your journey is being interrupted. You're being stopped, stopped, stopped. So you keep hitting destination. And believe me, those destinations suck. … You've got to let the thing move. Inhale, exhale…There are months where if you're fully loaded, you could have a 10% monthly drawdown. And it's no shame on you. It's saying you're engaged.”
The last time Hendry spoke with Real Vision TV he warned against a China devaluation, invoking a "Mad Max world", saying that "tomorrow we wake up, I mean, I would jump out the hotel window if this was the scenario, but we wake up and China has devalued 20%. The world is over. The world is over."
According to Hendry, all the China bears like Kyle Bass and Mark Hart have been timed out by now (or so he would like to believe) reminding us in the interview that he doesn’t care to look back or reflect on the past these days. Without outsized returns from his side – according to the most recent HSBC hedge fund report, Eclectica was down 6.6% YTD, however, Hendry is still pretty content with the current picture as it’s all part of the journey and not where we will end up.
“With macro, today is not the destination. Today is part of the journey, OK? And to write us off by the supposition that this is where we end up, I think is to miss some immense opportunities…. We're engaging with the brightest minds. And if the brightest minds are being stuck in neutral for four years– remember it's stuck in neutral. It's not losing money; it's just not making money. It's not that bad, if you will.”
We hope Hendry, one of the best minds of his generation manages to get out of his dubious funk soon; alas as we have speculated, the reason why he and so many of his peers find themselves at such a dramatic existential crossroad, with increasingly louder speculation that the hedge fund industry is now doomed and will soon be replaced by algos, ETFs, and other cheaper, passive products which will also implode the moment central planning fails, is precisely due to the central bankers they think so highly of. After all, the main skill of Hendry et al, macro investors or otherwise, is to find arbitrage opportunities in global markets. The problem, however, is when there is no longer a market, just one global policy vehicle that must be sustain at if not all costs, then certainly some $200 billion in central bank liquidity injections every month.
Readers can watch the highlights from Hendry's RealVision interview below, post-midlife crisis haircut and all.
To view the full interview, subscribe to Real Vision Television, which offers Zero Hedge readers a 7-day free trial.
