Hugh Hendry Is Back - Full Eclectica Letter

Tyler Durden's picture

Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for, for so long - another must read letter from one of the true (if completely unsung) visionary investors of our time: "I have not written to you at any great length since the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grotesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just as it did in the 1920s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed pricing regimes of the euro countries and of the dollar/renminbi peg."

In the letter the most surprising insight from the perpetual contrarian is his almost predictable contrary view of the dominant investing meme at the moment. To wit: "We are, as a result, long the debt saddled west and short the vastly over vaunted and over owned BRICs." More on this: "There is a near consensus that China will supplant America this decade. We do not believe this. We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point. By embracing his inadequacies and leaping on his luck, the strong man may have finally broken the binds that had previously held him back. We are also more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down. On the plus side we also believe that we are much closer than before to the beginning of a bull market of perhaps 1982, if not 1932, proportions. We just need the last shoe to drop."

We will let readers combs through the narrative that shapes Hendry's most recent outlook, although one chart worth pointing out is The Eclectica boss' visual summary of the "New Economic Order" which presents precisely the tenuous relationship between the Fed and the PBOC we have been decrying for so long, and which so many commentators (ooh, ooh, the PBOC is easing any minute now... oh wait, it isn't) fail to grasp:

Yet one thing we do want to point out is how different compared to your run off the mill 2 and 20 rent collector is the Eclectica M.O. when it comes to generating Alpha (as opposed to everyone else's levered beta):

As you know, I have a proclivity to make money in a bear market. The Fund's ten-year NAV progression demonstrates this survivorship bias; when bad things have happened, we have made money. We are very robust. Last year was no exception. Despite the challenges confronting speculators, I am much relieved that we succeeded in making 12% in a rather disciplined manner, and the Fund has now posted a CAGR of almost 10% for the last nine years.


Maybe that was the easy bit. The question now is just how we can make money in the tough business of global macro investing this year. As I am sure you by now know, I am nothing but a worrier. I have, I think, a soul mate in the prolific but often misunderstood Italian soccer player Pippo Inzaghi, the second highest scorer in all European club competitions. He has 70 goals behind him but he recently noted that, “the tension is always the same...I hoped to become less agitated with time, but this is also my strength”. I suspect he would have made a fine macro manager.


I meet a lot of inquisitive and extremely intelligent people in this business and I have come to think that maybe this is something of a problem. Perhaps they are just too smart. Perhaps they just try too hard. Rightly or wrongly, the highest return on intellectual capital of any endeavour in the world today comes from the management of other people’s money. So it is entirely rational (especially if you have never met a hedge fund manager) to assume the industry attracts the brightest, smartest minds. The beautiful mind, if you will. But I am not aiming to outsmart George, Stan, Julian, Bruce or the others. I do not think it is logical to try and outsmart the smartest people. Instead, my weapons are irony and paradox. The joy of life is partly in the strange and unexpected. It is in the constant exclamation "Who would have thought it?"


Why did ten year treasuries yield 14% under the vice like grip of iron-man Volker but yield just 1.8% under the bookish and most definitely Weimar-like Bernanke? Why does France in 2012 flirt with the notion of electing a socialist president intent on reducing the retirement age, imposing a top rate of tax of 75% and increasing the size of the public sector? Why do we hang on the every word of elected politicians when Luxembourg’s prime minister Jean Claude Junker openly admits, "When it becomes serious, you have to lie"?


You cannot make stuff like this up. It is simply too absurd.


That is perhaps a long way of saying that existentialism is alive and well in the 21st century. For, if the last ten years have taught me anything, it must be that the French philosopher Albert Camus, in his search for an understanding of the principals of ethics that can shape and form our behaviour, may have surreptitiously provided us with three basic principles for macro investing. I am perhaps doing him a gross injustice, but I would summarise as follows: God is dead, life is absurd and there are no rules. In other words, you are on your own and you must take ownership of your own destiny.


For me this has always meant being detached from the sell-side community. It is not a question of respect, it is just that I prefer not to engage in their perpetual dialogue of determining where the “flow" is. I cannot be reached by telephone. I suspect that I am one of the few CIOs who does not maintain daily correspondence with investment bankers and their specialist hedge fund sales teams. Not one buddy, not one phone call, not one instant message. I am not seeking that kind of "edge.” Eclectica occupies an area outside the accepted belief system.


I attempt to cultivate my own insights and to recognise the precarious uncertainty of global macro trends. I attempt to observe such things first hand through my extensive travel (I promise no more YouTube videos), and seek to understand their significance by investigating how previous societies coped under similar circumstances. But first and foremost, I am always preoccupied with the notion that I just do not have the answer. I am not blessed with the notion of certainty. Someone once said we should think of the world as a sentence with no grammar. If we do I see my job as putting in the punctuation. But above all, my job is to make money.


In keeping with this theme, I want define the three ingredients that I believe make for an outstanding macro hedge fund manager. These are, in no stringent order:


1. Successful but contentious macro risk posturing.


2. The need to choose the asset class offering the highest probability of payout should the conviction hold true whilst offering an asymmetric loss profile should the original premise prove unfounded


3. A best in class risk technique that stop losses the narrative and responds early with loss mitigation procedures (i.e. a method of staying solvent, rational and disciplined under pressure).


I have always figured that the first is the real key. That success was simply a matter of contentious macro posturing. In other words, going long very rich risk premium or buying cheap stuff. It is my assertion that what makes a great fund manager first and foremost is the ability to establish a contentious premise outside the existing belief system and have it go on to become adopted by the broader financial community. Bruce Kovner expressed the idea more eloquently when he said, “I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine...that the dollar can fall to 100 yen”. I am sure you are nodding in agreement, except Bruce was saying this when the USDJPY was well over 200, not today's rate of 80!


That is the kind of guy I want to be when I grow up. Recall that I have the kind of imagination that can conceive of the yen trading closer to 60. Similarly, if we look back and reminisce about previous years, the Fund's 50% return in 2003 was derived from a legitimate but certainly contentious view that China's WTO entry was set to boost the cyclical "old" economy of the West and that fiat hyper-management of the financial economy could propel gold into a super bull market. To think these views were once contentious; plus ça change!

Who would'a thunk it: one just needs some imagination and creativity, the ability to visualize that which most of the other ones cant or are too lazy to do it, and just wait as the bizarro market takes over and makes the impossible not only probable, but conventionally accepted by the herd.


And a segment that all the Whitney Tilsons of the world should read:

I fear that our no longer small community has been compromised. Funds are neglecting their hard portfolio stop limits. Last year was generally very tough for long/short strategies and I commiserate with all concerned. But last year witnessed too many world class funds lose over 15% in the space of just two months. Of course today they are celebrated once again for making double digit returns in the quarter just ended yet they still languish below high water marks and their Sharpe ratios are busted.


You could probably live with that if you are a pension scheme or a large, sophisticated fund-of-fund because you have a global macro sub-sector that is typically long gamma (just look at our credit tail fund's 46% gain last year). The unfortunate thing is this group exercised its stop losses somewhere between 2009 and 2010. That is to say, they honoured the pact they had with clients. They adhered to the terms of their risk budget. I fear that owing to this nasty experience, today no one in macro is running much risk. I suspect daily VaR budgets are anchored at 50 bps or less. That is to say, I fear the financial world is in danger of harvesting a monoculture of fund returns that could prove less than robust should the global economy suffer another deflationary reversal...

Read the full letter below:


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SilverTree's picture

It will never work.

Harbanger's picture

What? you're not going to link Jimmy Kimmel at the WHCA Dinner 2012

 I've never seen a comedian challenge Obama and the establishment on so many issues.  Amazing!

dogbreath's picture

Oh ya, challenge the administration on so many issues...............more like how does he get the taste of the condoms out of his mouth

dogbreath's picture

all you cock suckers that junked me............. go fuck your selves

chump666's picture

Hendry you are a true chaos trader.  We all await the central banks losing complete control.  Anyday now.

CPL's picture

He's a canary in a coal mine.

Peter Pan's picture

Hugh is always worth listening to, but with a performance by him of between 10-12% per annum, one asks why gold and silver achieved even better without the sweat. Answer is simple. These metals despite their manipulation are making a mockery of human meddling in the market.

The only metric that truly matters going forward is jobs and better paying ones at that. All else is window dressing at best.

easypoints's picture

"The highest return on intellectual capital of any endeavour in the world today comes from the management of other people’s money."

True, until those people no longer trust you with their money, because they don't trust the money itself. Today's FIAT is created and managed by those with either no intellect, or no regard for the very people who use it. Should confidence in any currency be lost , hedge fund managers will share the penalty with the central banker down the street.

wandstrasse's picture

Should confidence in any currency be lost

Confidence in any currency has already been lost. Money managers lost it as well as average people. Fiat is NOT about confidence. Fiat will be in use as long as it has purchasing power. And how does counterfeit money get this power? Two components: 1) counterfeiting is law, worldwide, people must obey. 2) Lots of military effort that THE basic necessety - oil - can only be purchased with the mother of all fiat: the dollar. Because the harshest worldwide law would not do if people all over the planet cannot buy something wich is needed all over the planet.

Snidley Whipsnae's picture


"2) Lots of military effort that THE basic necessety - oil - can only be purchased with the mother of all fiat: the dollar."

China purchasing oil from Iran with gold and finished goods is one example of many that will end run dollar hegemony. In addition, many countries are already conducting trade in their local currencies or have set up direct barter in their commodities or in finished goods.

If the US continues on it's reckless course of printing, thus destabilizing BRICKS currencies and causing inflation and possible social unrest in their countries, BRICKS efforts to avoid the dollar will be redoubled.

The ability of the US to continue it's currency domination is not at all a sure bet... if it were, central banks around the world would not be loading up on gold as a hedge against the dollar and other paper of all descriptions. 

PMs are slowly reclaiming their rightfull role as the only real money sans counter party risk... manipulation be damned. Why would this be a surprise to anyone that has even a passing knowledge of past fiat history?

Hendry is a very intelligent guy but as he points out there are lots of intelligent guys running hedgies. All of them stumble from time to time. As Hendry pointed out in an earlier interview his worst 'mistake' was having a great year with 50 + % return to his investors. Many of his biggest investors cashed out after the windfall and invested elsewhere or simply retired and placed their big profits in what they perceived as 'safer' investments. Hendry now understands that his funds are better off having a lot of ~12% years and avoiding losing lots of suddenly wealthy clients.


BorisTheBlade's picture

This and ZIRP in perpetuity that diminishes yields and renders achievement of sufficient returns almost impossible. Fund managers of course are going to get screwed when currency collapses, because no matter how hard they sweat they will fail by association with the centrally planned money printing. I bet next agents who will rise from the ashes of currency mayhem will be barter agents or whoever comes up with a convenient (and relatively honest) way to mediate transactions while avoiding FRNs or any other fiduciary moneys.

eatthebanksters's picture

There is no penalty, only a termination bonus!

rufusbird's picture

Well, one must consider what to do with the rest of the portfolio. Gold advocate Jim Rickards's recommends 10 to 20 percent of one's portfolio in gold as does most of the Registered Representatives of most brokerage firms. I recognize and understand the arguments for a larger postition, but allowing for diversification, what does someone do with the balance of their portfolio...?


WonderDawg's picture

Depends on what you believe the future holds and what your objectives are, so you have to look at all options. Just a few: If you think deflation, then cold hard kizzash is going to win the day. If you think inflation, stack PMs and ride the equities markets. If you think biflation or stagflation, again, I think equities or metals. Under anything but deflationary conditions, strong corporate bonds might be okay. I can't see any scenario under which I would invest in munis. Plenty of other strategies, as well. In other words, with the level of uncertainty we have today, there is no easy answer to your question.

FEDbuster's picture

Long term storage food will always hold it's value, unlike gold (who's value has never gone to zero) you can eat it.  Maybe it's just a small part of your investment portfolio, but it's nice to have when needed.  I would add a battle rifle and 1K rounds to go with it.  A year's supply of food and the means to defend can be bought for under $2K (or about one oz of gold or 3 shares of APPL).

strannick's picture

with the rest of your folio? buy silver obviously. diversification bitchez

grid-b-gone's picture

If we need non-fiat money then it follows that we need our own self-sustaining job. Entrepreneurship, like gold, keeps one in a position to help others rather than looking to be helped in a crisis.

If jobs are the only metric that truly matters going forward, get one (make one, if necessary), and hoard it like it's precious - because it is.

Jack Sheet's picture

Hendry s a y s 10-12% but in my experience all fund managers fiddle the results. The last time I looked ( more than a year ago) all his funds were either flat or up/down +/- 5%

Corn1945's picture

"and America's acceptance of the unpleasantness of debt"

Is there another "America" on this planet that I haven't heard about?

There has been very little de-leveraging at the private sector level while government debt levels are spiraling out of control.

Is this guy from another planet?

Harbanger's picture

"The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point."

I was pretty sure he meant Govt. debt when I read it.  Maybe your interp is correct.  One thing I know is he's not betting on Obama's re-election.

Richard Chesler's picture

"we also believe that we are much closer than before to the beginning of a bull market of perhaps 1982, if not 1932, proportions. We just need the last shoe to drop."

He's not counting all the legs of the fucking squid.

strannick's picture

id bet hendry a silver eagle that obbie gets re elected. i dont think the rominator is going to be to big with liberals Christians women blacks hispanics or conservatives. and since all obbie knows how to do is print since hes never had a real big boy job that works for me and my a.g.

Bubble's picture

Obama, Romney, it makes no difference. Therefore your point is irrelevant.

Corn1945's picture

Also, our bond yields are low because the Financial Terrorists (Bernanke, et al) are monetizing our bonds.

If he can't get that right, what else is wrong in this letter?

Peter Pan's picture

Exactly my sentiment. You have the borrower extending his card limit and dictating the interest rate on that card. How twisted can that be given that the borrower is both monetarily and morally broke.

Spitzer's picture

He thinks like a rating agency.

Japan and China own the US but he gives the US a higher credit rating then the creditors.

GMadScientist's picture

This from the foolio that was talking shit about the Zooro being a reserve currency. LOL

Spitzer's picture

You think this is over ?


Spitzer's picture

Dispite the Euro hate-on orgy, why is it still worth more then the dollar ?

Buzzworthy's picture

Chinese buying has put a $1.30 floor under the Euro Dollar trade.  China began pegging the RMB to the Euro last year in response to dollar debasement under QE2.  China plays the Euro against the dollar and vice versa, per Rickards' explanation in Currency wars.  Unless I'm misreading the first paragraph of the Hendry piece, he seems to have missed this.

The Big Ching-aso's picture



I don't understand his contrarian optimistic stance when 46M+++ jobless Americans are SNAPping free food up like poor people.

Spitzer's picture

So Hugh Hendry is BULLISH on the US and BEARISH on the US's creditors at the same time ????

That doesn't make very much sense me thinks...

UP Forester's picture

People like contrarians in an environment like this.

Even if they're just hanging on to the dry end of the Titanic.

Spitzer's picture

lol, the dry end of the Titanic.

chump666's picture

He is a trader.  Right?  Ok, so Asia goes US will be bid. Simple.  You watch the news?  You see Malaysia getting frisky, Indonesia may lose it's rating, Singapore has inflation overkill, Thailand could have social unrest again, China MAJOR PROBLEMS across the board, social, political (re: US embassy in China and Chinese dissent being kept there) and then there is Japan...



Spitzer's picture

He is a trader.  Right?  Ok, so Asia goes US will be bid. Simple. 

You call that contrarian investing ? That is the kind of thing you hear on CNBS's "Fast Money"

chump666's picture

Yeah well CNBS don't mention that the whole system will collapse in our lifetimes.  The market is dying.  But you get some where you can.  Asia will be first to go , then the world. 

America's bust will be spectatular you can lock that in.  But hey Asia having street protests now while Americans are in sleepy la la land.  Omen baby

Spitzer's picture

Asia will be first to go , then the world. 

Like I said, that is not contrarian at all. It is Fast Money, Wawwen Buffet bullshit.

The Big Ching-aso's picture




Maybe he's secretly contrarian on his contrarian stance which would be contrary to what everybody else contrarily thinks.

JohnKozac's picture

China (and Hong Kong) house prices are ridiculous (look online at what they sell for)....unsustainable...Reminds me of those poor deluded folks who stood in line in Las Vegas to buy a condo at $700 a sq ft back in 2006, 2007.....

chump666's picture

Australia, New Zealand and Canada will be dead zones once their housing busts kick in...brutal

ekm's picture

Aus and NZ depend on China for exports.

I agree that Canada will suffer huge housing crash, but no dead zone for sure. USA will buy our oil no matter what.

chump666's picture


But Asia is flipping out:

*Political tensions overshadowing China SED talks May 3-4
*China mkts closed for holiday today and tomorrow
*Traders say PBOC may fix USD/CNY higher in protest, see USD/SGD dragged higher

Nasty and the chaos begins.

Desert Irish's picture

You say "Canada" but the issue is that all the commodities the world wants is West of Manitoba - Those condo's they are throwing up at an alarming rate in Toronto going up are due to hot Chinese money both mainland, Taiwan and Hong Kong. When the housing crash comes it's going to be devastating for the East but not the West. The dead zone will apply to what province you live in. So for Ontario (downgraded again last week) and Quebec it's not going to be pretty.

chump666's picture

Whole world will be an economic deadzone.  Maniac leaders and central banker lunatics are going for the last gasp.  Astounding that the offset of the commodity slowdown is property re-inflation.

Yeah deadzone, squats, riots, money system broken beyond repair etc.  Still betting it starts in Asia, they collapse first, sends us into the iceberg.

We had it coming.

Freddie's picture

Aus and Canada will be fine as long as they can export commodities. CA has no problems - as EKM says.  Aus should be fine as long as they have commodities.  NZ is a haven for rich people who want to get away to a sane place.  NZ is like the Switzerland of the Pacific Basin.  NZ should hold up fine.