Hugh Hendry Recreates ABX, Discloses Mystery Trade With 1.5% Downside, 75% Upside

Tyler Durden's picture

Hugh Hendry, always beautifully opinionated, nails it at the Russia 2010 forum with the following oneliner: "Who cares about anyone's opinion. You pay money for what they do with that opinion." We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said "nobody gives a fuck about your opinion." On the other hand presenting amusing observations coupled with engrossing narrative, that nobody seems to have an issue with.

The following clip from the Russia Forum pits one against another Marc Faber, Hugh Hendry, Nassim Taleb, PIMCO's Michael Gomez, Investec's Michael Power, resulting in a memorable debate. A few blogs caught this clip and posted it yet few actually watched it, as the biggest news from the panel was not Taleb's admonition that "every single human being should be short treasuries", an opinion which Hugh Hendry squashes through the groupthink meatgrinder, but Hugh Hendry's cryptic disclosure that he has uncovered the ABX trade for the next decade, which has "1.5% downside and 75% upside." Hendry teases, but until the end refuses to disclose what the specific trade is. And while we realize the futility of recreating others' opinions, here is the money quote from the Scottish contrarian:

"The problem with the bailout of 2008 and the first quarter of 2009, is that it did nothing to eliminate the debt. The debt is just unprecedented in the western world... We've had a tripling in leverage for the last 30 years. That tripling in leverage has produced unprecedented gains. The British stock market up 43 times in nominal terms, the S&P up 25 times. This has left many people still hungry for risk. I have a portfolio today... In the UK we have interest rates which are at a 300 year low, since the bank of England was conceived in 1692. I get paid money every day underwriting the risk that the BOE will cut rates further. I use that to cheapen an option which say "I don't think the Bank of England, and ECB, is going to raise rates in the next 4 months." And if nothing happens i make 5 times my money. If they raise rates, I lose my premium. My premium is not a lot. I'll survive that. On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it."

And continuing with opinions, here is the former GSAM and Odey executive on Treasuries:

"I am hugely intellectually bullish on Treasuries. I am long. I fear the end of QE, the money funds are making on the [curve], I am aware of the issuance, I am aware that the States is going to have to sell $2.5 trillion of this stuff. But that's the marketplace - the marketplace disseminates the bad stuff. I think there is a lesson in Japan. You think they are going to succeed - Mark [Faber] thinks they are going to create inflation. The precedent of Japan suggest that if you allow leverage in your society to breach a certain level, let's call it 200 or 230% of GDP, then what happens is monetary policy doesn't work, fiscal policy doesn't work. They've had helicopters, they have distributed free money to their citizens, they have built bridges to nowhere and prices are falling and look set to fall further. My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation. Now if something untoward happens, the gamma on that trade bankrupts you."

Elsewhere, you will hear Taleb's proposed portfolio composition (if you have read Fooled by Randomness or The Black Swan you won't be surprised), as well as his escalating and very much justified disdain for economists: "if the number of economists from US universities in a country is high, the country risk is high, if the number is low, the risk is low."

And a whole lot of debate over China, with Hugh Hendry dismantling Jim O'Neill and the other China bulls. "I love Jim O'Neill. I love that Goldman Sachs guy. He says you either get it, or you don't. I don't get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit." (Kinda funny, coming from a former Goldmanite.) Please watch Hendry's view on China beginning 55 minutes into the clip.

For those P&L detectives here is Hugh's most recent missive. Good luck with extracting what the next ABX trade is.

The full hour + debate can be found here. We think far too highly of our readers' intellectual ability than to point out that the English audio stream would require hitting the Eng button.

Click on the icon for a link to source.

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andrew123's picture

Tyler, any performance data for Hendry's fund you could supply?

Anonymous's picture

Hughbert the vaporware.

antonio's picture

Hendry is not a Goldmanite, as far as i know he has never worked for the squid

Anonymous's picture

I have been very interested with Hendry's thoughts. what is his track record like?

Anonymous's picture

Love to hear thoughts on deconstructing ABX trade.

merehuman's picture

i have looked all over the house for that english button. Dog must have eaten it. Same place my equity went!

monmick's picture

Lower right-hand corner. Next to the volume <ENG> <PYC>

merehuman's picture

thanks.  captcha didnt allow the minus sign. cheech

IKEA Is Swedish's picture

Some of Hendry's CNBC (UK) guest host spots are available on YouTube.

Highly entertaining and informative.

crzyhun's picture

This why I read ZH particularly the posts that matter.

I still suggest a long vol. trade. As for the video, I am honestly too short on time, but mostly too dumb to get the high level of dialogue here. Gamma? Last I used that word was with a ray gun in the 5th grade. Sorry.

BUT, I am aware we are heading toward a tipping point, a no return point where we go through a type of black hole and end up looking totally like Japan without the sush up to our groin in wasabe. I admit to not being long stocks, but I am worried about MM funds and seek an is not totally it. TIPS some, not correct either. If Hendry is right, there are no alternatives to TB/Bls. Ouch.

In the eternal words of Oliver Hardy, "Well here is another nice mess you got us into." Thanks for nothing.

CONners's picture

Is gamma the rate of change of delta which is the rate of change to the price of an option relative to the rate of change of the underlying security? Given F=ma, then gamma is to "a" as F is to what? Does speed kill or does acceleration?

Anonymous's picture

Technically it is mpulse. Practically momentum tells you enough.

Anonymous's picture

aka sudden stop

Anonymous's picture

Gamma is the second derivative of Delta. Delta is the sensitivity/rate of change.

Short. Gamma is the acceleration (at specific point in time). Long gamma is a more aggressive form or long volatility, you are betting the shit hits the fan and that it splatters faster than expected.

Anonymous's picture


Your boss told you nobody cared about your opinion because if they did, you would be the boss, and he would be the underling. Get it?

About the "calls" by Henry and others at the Russia 2010 Forum, it's all about "theatre".

They never, ever, go back and tell everyone that they screwed up.

Paulson's trade? Corruption and theft doesn't make a man a genius.

Gordon Freeman's picture

The only way to be "right" with these idiots is to be them:  that is, individuals who are richly rewarded to express any opinion.

As others have asked, what exactly is Hendry's track record for his investors?  Does he have any?  Does Faber?  

If they are so successful, why doesn't everybody invest with them?  Really--is that such a stupid question?  

(cricket sounds...)

Roscoe's picture

Hi Tyler,

Just wondering, is Marla OK? I don't post much, but I do follow almost every post and poster, so I worry when someone goes dark for a while. I hope all the principals are getting along and everyone's health is good! (Fight Club just wouldn't be the same without the Foil, and you've all come too far to break up the original gang!)

Best Wishes to all, especially you & Marla,

A Loyal Space Monkey,


Instant Karma's picture

Black hole of bad debt will suck the risk trade into a vortex of whirling destruction.

Anonymous's picture

Am I truly stupid? I've tried to find the English version because the Russian translator's accent is too annoying but hitting the English button still brings up the dubbed version.

glenlloyd's picture

yes but is it swirling clockwise or counterclockwise?

Anonymous's picture

Engineered crash in progress to mask end of QE in the UK and the refi of 1.6T of short term debt in the US !!

Quantitative Wheezing's picture

Hugh Hendry has alluded to this masterful trade in his musings on Japan.....

Jefferson's picture

"All I see is dead people" is a Hugh Hendry classic.

Anonymous's picture

As usual- lot's of talk but very little to show for it...
On the surface the results for the funds are quite poor from what I can see

Anonymous's picture

Obviousness once again takes a back seat. Refreshing.

chindit13's picture

As of this writing, Japan has giving up the ghost on Nikkei 10,000 and the Mystery Sunday Night futures ramper in the US must be a Saints fan because he/she has gone missing.

bluebare's picture

Shot their Sunday night stash Friday afternoon?

Anonymous's picture

I love watching Geithner in the shadows behind the people asking questions, sticking his tongue out. haha He looks lost and TOTALLY uninterested.

Anonymous's picture

We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said "nobody gives a fuck about your opinion."

Are you taking about Raj from Galleon? Did Tyler use to work at Galleon?

aus_punter's picture

HH loves deep o-t-m options.... he spent the best part of 2009 looking for no rate hikes from the RBA..... I guess those options were "cheap" for a reason.... so I wouldn't get too carried away with his asymetric pay off trade

godfader's picture

Hugh was down 8% or so in 2009. He made 30-40% in 2008 though.

Bear's picture

His thinking must have been pretty far out of the box

Anonymous's picture

what he is trying to say is he has the capital to muddle through the difficult time. the problem is that US has the same thing i.e. overcapacity either real estate or production?

So if someone does not have the capital like Mr. Huge has, what should he do? Investing in US treasuries? I think that is funny proposition.

Anonymous's picture

Moin from Germany,

wouldn´t surprise me if his BET has something to do with the Australian bond market....

If i remember correctly he mentioned such a "black swan" type trade ( betting on a sharp decline in rates down under) in one of his latest investor letters.....

Anonymous's picture

he told me he wouldnt buy gold until it got to 650 - beware of being overly sucked in by Hugh's onviction - he doesnt understand that Gold is money and paper is paper

antonio's picture

Hendry is not a Goldmanite, never worked for the squid as far as i know



Anonymous's picture

He was down 8% in 09 because he is shorting the fallacy of recovery.

His thinking isn't too far out of the box. He basically digs deeper than the group think and biased opinions that are pushed.

godfader's picture

Hendry is from Odey. Who was so dumb to think a nuthead like Hendry would have been offered a position at Goldman? Oh wait.. Cramer was at Goldman?

Anonymous's picture

I believe Hendry misspoke when he said he is betting that central banks do nothing for the next 4 months and that he makes 5x his money if he's correct. Markets are not expecting any tightening over the next 4 months I know of no trade on the planet which will pay 5:1 if the Fed, ECB, BOE stay pat for the next 4 months. Now if you want to say they stay pat for the next 12-18 months, there are plenty of ways to get paid off 5:1 or better on that.

As for his Paulson trade, I believe he is referring to CDS he has purchased on Tokyo Electric and Tokyo Steel. You can insure $10M for just $25K/year, or so.

Anonymous's picture

while hendry makes interesting points, monetataty policy doe not work-he is a fool because he does not acknowledge the root problem is confidence in money and that every money other than gold is some ones liability.

Roy Jastram (UC Berkeley-The Golden Constant")showed gold fares better during deflation than inflation. It is a hedge against systemic risk as well-not gold hit 1000/oz when the S&P hit 680.

Likely, your treasuries are not even held in your name-they are in the name of the institution-and they can be lent as can all your stocks unless you gone to great lengths to insure otherwise.

Your money is in pixels in a bank-and should those institutions begin to fail-gold will remonitize-and that is what is happening despite the greatest efforts of the central banks to manipulate it from the London gold pool to

Alan Greespans, "Central banks stand ready to lease gold in ever increasing quantities should the price begin to rise"

When hendry takes that on-I might listen to him, but at present I find him a self indulgent shill.

phaesed's picture

cash is the Federal Reserves liability.... the true reserve currency of the world is US Treasury bonds..... until that changes, it's the only true money out there.

Anonymous's picture

Mr. Hugh is saying wealth is not built on overcapacity. Make him sounds like wise and make himself feel like a wise man. But without a production capacity building, where is wealth coming from? Building and managing a country like China size is not an easy job, it is like frying a fish for it is easily overdone. But China is improving its citizens' living standard year over year. Would that be a wonderful thing?

Anonymous's picture

There are a lot of trades like that. He fails to give the probability of the downside and the probability of the upside.

I could play the lotto with 100 dollars buying 1 ticket.

phaesed's picture

lol, I don't need to say anything here....

But I needed to let you know that ;)

jswede's picture

"On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it.""

>> if I've been paying attention to Hugh (and I have), this trade is short risk on sovereign CDS -- not Greece etc, but the "it cannot happen here" countries like US/Germany/Japan/China...  Hugh has been talking about Euro sovereign CDS risk and that the PIIGS will dismantle the Eurozone for years.  He's also been pushing the fact that debt deflation is equally as bad for the surplus nations, they are built for a Western World growing its debt (and demand) by 10-15% per year, and won't meet budgets without it returning... IIRC, he was talking about German CDS early last year, and mentioned this type of ~1% risk, 50x return...

godfader's picture

If Club Med implodes and the Nazis bail them out then German sovereign CDS will soar. That's his play. He mentioned he is financing these type of low probability/big pay-off trades with high quality corporate bond coupon payments. In particular he mentioned Philip Morris debt.

Anonymous's picture

Uh, this statement is super-dumb.

I can come up with 100 trades that cost 1.5% and pay 75% in some scenario.

They just wont happen. Much like Hendry's trades. The fact that he says something so stupid show he doesnt know what he is doing. His LT perf is highly mediocre.