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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chump666's picture

I would be worried if the price drop takes out the terms of trade, appears to be happening in Australia.  Both NZ and Australian run large per capita fiscal deficits.  Like Canada all commodity producing countries are paranoid of mass unemployed form a China crash.  So, in their infinite insanity they are re-inflating credit markets/property.  Canada and Australia's property markets should have crashed three years ago, both goverments are using taxpayer monies to fund RMBS purchases from their banks.

Relying on China to fund the world is like buying shares in the Titanic, and chilling out in first class - hoping for the rosy times ahead.  But instead...f*cking being wiped out.


Doña K's picture

New Zealand is indeed a great country. However:

DOCTOR TO MALE PATIENT: You have six months to live.

PATIENT: I want to live longer.

DOCTOR: Marry a Jewish girl and move to New zealand.

PATIENT: Is this gonna make me live longer.

DOCTOR; No! But it's gonna seem longer.


yourfather's picture

plz explain how indonesia will lose its rating considering that it was only just upgraded to investment grade.


if anything, indonesia has a vibrant middle class and has skipped a generation in technological application. i.e. you now have grandmothers using mobile phones to bank who were born in a village with no electricity or running water only a few tens of decades ago.


they have large facebook and twitter populations and they are a prime market for social networking, the way their culture is a group oriented social society.



Lednbrass's picture

I would like to ask how facebook and twitter mean much of anything. I guess its great that now they can get once a minute updates from grandma in a rapture over her new running water, but what do either of those things really add or do beyond amuse bored people in their leisure time?  What truly productive thing stems from either one?

Can you manufacture goods more cheaply or quickly with either one? Do they make people more productive at work? Will a medical breakthrough come about from relentless updates on the current state of granny's cholesterol level? What actual concrete acheivements do you see coming as the result of either facebook or twitter?

All I see is zombie idiots broadcasting trivialities.

yourfather's picture

glad to discuss this with you all...


Regarding the fuel price rise and so on.

The prices of fuel are subsidized by the government and are meant to have an impact on the smaller people. the problem with the reduction in the subsidy was that there were massive protests (although not entirely popular ones) to keep the subsidy as is. 

The reality is that the government is spending more on petroleum subsidies than it is on education etc, and because it's a subsidy that benefits wealthy people more than the regular person on the street, it's really a good policy to follow. Sure they delayed the reduction in the subsidy, but what they have done is ban engines over 1.5 litres from using the subsidized pumps. The national petrol company pertamina has opened non subsidized gas stations. there are substantial campaigns to stop luxury cars from using it. If you look at it from the other side of the coin, filling up your 110cc motorcycle with two or so litres costs less than 20,000 Rp. If you remove the subsidy, it will make the price rise but it's still within the affordable range because you'll see prices around 20,000 rp. 


To put it into perspective, you can get about 100km worth of travel on your motorbike from about 2 bucks of gas. 


Regarding manufacturing goods more cheaply or whatever with facebook and twitter, what I am trying to say is that yes, you can manufacture cheaply in Indonesia, with the average wage of a worker in a factory in Bekasi being about $200 US dollars. The key is that the economy itself is undergoing structural change which is being led by technology. previously you had isolated communities with no access to information, where the society was a relationship based society, where it was not what you knew. Now you are seeing that there's a transition to a more information based society. for example navigating traffic jams in jakarta is done through a website called lewatmana (which way to go) and this has productivity gains for motorcycle taxi's and so on. 


The reality is that the policy of petrol subsidies was delayed only because of the protests. It's not a mature country from a democracy perspective so expecting it to roll out to our eyes as to our standards is a bit unfair. The key is that the SBY Government failed to execute the appropriate PR Campaign, and this has been recognized by some people like Hatta Rajasa who said - "Di samping itu, kebijakan pengaturan BBM bersubsidi memerlukan persiapan dan sosialisasi yang memadai, agar masyarakat tidak panik,"  - next to this, setting up the petrol subsidy issue requires preparation and socialization (i.e. PR) so that the people don't panic.


Remember people that this country is a young one and the levels of education etc are much lower than what you are expecting. There has been a significant effort to eradicate corruption and it is still making decent steps to achieving a more inclusive society. 

chump666's picture

...also India is about to go.

more on Indonesia:

Local selling in medium to back end IDR bonds seen today
Outflow concerns on BI's bank acquisition plans, weak IDR outlook weigh
Yields are up by 2-3bps so far
10yr FR61 last at 107.75-108.50, yield +3 bps
20- and 30yr yields up 2 bps, bids at 115.75 and 98.0 respectively

USDs should be bid, stocks selling down at least 10% or more correction, USTs bid and nutcase Bernanke hits QE3 end May start June (depending on the correction). that point China is in meltdown as is Asia, Europe just erupts into riot zone (goverments collapse in all directions).  Oil goes bid after Iran goes bonkers again rolls out a nuke.

That's the chaos trade good or bad...

smiler03's picture

I'm not familiar with Hugh Hendry but seeing his claims on making 10% yoy I thought I'd look for any UK Funds that I could invest in. There are only two (both Eclectica) and both of them have produced shit returns.

I'd rather invest in horse manure.,-prices--and--factsheets/search-results/c/cf-eclectica-agriculture-class-a-gbp-accumulation/charts,-prices--and--factsheets/search-results/c/cf-eclectica-absolute-macro-accumulation/charts

Hoplite's picture

Those are the retail funds. IIRC you can't invest in the "real" Eclectica funds unless you pass the various FSA tests for being a qualified investor.

fonzannoon's picture

Spitzer I am a big Jim Rogers guy and he keeps repeating that he is short emerging markets, short technology and does own the USD. It makes no sense to me either but I am certain they both know more than I do.

tu-ne-cede-malis's picture

I'm a Rogers fan as well...isn't he still bullish on China?  Hendry/Faber are bearish, while I think Jim is still bullish long term (look at his reasoning behind moving to Singapore!).

fonzannoon's picture

From what I hear from him he is bullish big time on China although he admits it won't be a smooth ride. I am just saying Hendry's big call here does not seem that crazy when it's put in this context.

Spitzer's picture

I am a big fan of Rogers too but he does allot of short term trading that he talks about in the media. His long term positions have always been the same. He also admits to being a horrible short term guy.

So where would you rather be ? In Jim Rogers short term position or his long term position ?

Im sticking to his long term position. He is rich enough to gable with short term bets but I am not.

ironsky's picture

Would you want to try to collect from the US? They'll either kick your ass, destabilize you, or ask you why you want to mess yourself up by forcing them to make the repayment worth-less. At a point in some battles, your situation is so hopeless that you call in the artillery on your own position. Been done.

grid-b-gone's picture

In this environment, BULLISH can mean anything from a small gain to relatively smaller losses.

The BRICs are showing weakness, fiat and debt to be paid back in fiat may find it difficult to find a market in the future, derivatives are a house of cards, etc. 

Gold and other PMs, oil and energy, some art and collectibles, land, especially ag land, fertilizer and fertilizer components, stock of solvent companies, income-producing RE, and some residential RE where its price exceeds current replacement cost, are on the short list of stores of wealth likely to partially survive eroding fiat currencies.

The U.S., as the largest economy, has the most choices. As long as the Fed does not print the dollar much faster than the euro and yen, it is TBTF and has power over its creditors. If this holds, Hendry is correct to be bullish on the U.S. and U.S. markets on a relative basis, even if U.S. debt gets priced with an increasing amount of doubt.  

Cassandra Syndrome's picture

Hugh Hendry rocks! Watch this video clip from BBC's current affairs program Newsnight from over 2 years ago where the Keynesian Nobel Laureate Professor Joseph Stiglitz was completely outclassed and particularly retrospectively by Hendry over their polarised views on Greece and its fate. Enjoy!

CvlDobd's picture

Odd letter. I guess it makes as much sense as anything else I have read recently on various trading thesis'.

hamurobby's picture

Huge Henry is probably as confused and cautious about investing as you are when riding (by your avitar pic) your motorcycle on a racetrack.

CvlDobd's picture

Lol. Which one of these lever Doo hickeys makes it go faster?

hamurobby's picture

Motorcycle roadracing is way more fun than golf, and it takes two balls to play.

Freddie's picture

I loved the bit about Hugh having a soul mate in the outstanding Italian striker Pippo Inghazi.   They both worrry which motivates both of them to excel.  

Assetman's picture

Actually, I think Hendry's views have changed markedly since the end of 2010.

What he is saying now is that the US policy of exporting inflation to inflict damage on China has finally had its intended effect.  It means over the next liquidity tightening cycle, that China... and the countries tied most closely to China... are going to feel a lot of hurt.  The tightening of liquidity has already begun in China.

It doesn't mean that the US isn't vulnerable-- these markets will take their hit once the liquidity leaves as well.  But it appears this time around, the USD will likely gain in strengh against everything... except the yuan.



Cabreado's picture

Not to offend anyone, but there comes a time, eventually, when "sociopolitical" (and other fun stuff) usurps "markets."

yourfather's picture

would someone post the letter on something else than scribd - ftp whatever - pdf format preferrably?

neidermeyer's picture

Sorry , NO CAN DO on the request ... however here's the direct link to it on Scribd so you can download it in .pdf format ... or go to and search for April 2012 TEF Commentary .

junkyardjack's picture

You can't download it from there

yourfather's picture

hey thanks but for some reason it's blocked or not working here...



bugs_'s picture


"US rejects globalization"

"the death of Asian mercantilism".....will the death of Euro mercantilism happen before or after the death of Asian mercantilism?

This was hugh!


pain_and_soros's picture

He's so contrarian that he's become mainstream...

Read the fine print...Past performance is no guarantee of future results....

GS-DickinDaMuppets's picture

Hendry is right to be a contrarian, especially with all the government "MAGIC" that abounds in the U.S. financial system (Corzine not being in jail comes to mind). I have invested as a Bull up until the "Paulson Crash" of September 2008 and NEVER even considered owning PM's (Ag & Au), but not any longer - you better know that since that time I have been buying PM's as often and as much as I can afford, and like Hendry "I'm a BELIEVER"!!


...doing GOD's work...GS-DickinDaMuppetts

Pairadimes's picture

Yes, but how is he with an AR-15?

dick cheneys ghost's picture

His recent Barons interview was quite good.........


Question........Can the petrodollar system survive without The Fed?


and Can The Fed survive without the petrodollar system?


sorry for the questions, but i come here to learn...

francis_sawyer's picture

So ~ He's saying if the VIX hits 80 again then that bodes well for certain US equities...

Well if the VIX hits 80 again, you're probably looking at 'official QE3' again (how many trillions this time) with an S&P of 1,000... Sure, what the hey? Go long equities... All that's really saying is that we'd be due for a 'half life' version of March 2009 or August 2010...

In the end, it's all just money printing that makes the world go round...

kalasend's picture

What's your point? Hate the high-probability but short-term profits? 

JohnKozac's picture
No end in sight to global jobs crisis, ILO says


GENEVA (Reuters) - Fiscal austerity and tough labor reforms have failed to create jobs, leading to an "alarming" situation in the global employment market that shows no sign of recovering, the International Labour Organization said on Sunday.;_y...

vote_libertarian_party's picture

"labor price restructuring" in the US???  When did the manufacturing cogs take a 95% paycut to be competitive with the Chinese mfg cogs?

kalasend's picture

No, US mfg don't need 95% cut to compete with China counterparts. If you used to think so, you are ____(insert words that hurt your ego)___

fonzannoon'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."

But it's a big shoe...right?

WmMcK's picture

Right, too large to throw and even hard to kick.

harleyjohn45's picture

Hendry talks in circles, he says he is bullish on America.  Does he believe the regulators are going to let companys operate here.  Does he believe Americans can compete with the $40.00 per week chinese labor.  Anyway good luck to him.

reader2010's picture

I had anticipated the same outcome back in 2009. But, the results had been terrible. Will it work this time around?

q99x2's picture

Thankful for the posting.

erg's picture

I try to identify the most ironic of outcomes in life because it seems to happen way more that it should.

My little portal to the future.

Thorny Xi's picture

"establish a contentious premise outside the existing belief system and have it go on to become adopted by the broader financial community"  Or, as Calvin once told Hobbes, "Since nobody knows when the right time will be, just go to the right place and hang around."

BeetleBailey's picture

Great post.


I watch CNBC world (muted, only for the data), and missed Hendry (one of the few that I will listen to).

Hugh is better in person/on camera, as his bile is viseral. The financial markets need more of people like Hendry.

WmMcK's picture

And I watch Russia Today (muted, only for the eye candy). That Lauren Lyster is addictive, if not visceral.

ThisIsBob's picture

Yea, I watch, muted, just for the headlines.

ExploitTheMarket's picture

Is there any way to print this thing out? even when I log in to scribd I can't do it.....