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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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Mon, 04/30/2012 - 03:04 | 2384433 silverdragon
silverdragon's picture

BRICs are doing fine with growth levels the west would die for.

Physical silver, agricultural land or a business you own and run are three of the safest things to be doing.

Ref the US being the largest economy I guess you are referring to GDP which is a bit of a nonesense statistic as it measures consumption. All those banksters doing all those nonesense deals increasing GDP but creating nothing.

The country that produces everything has the most options.

HH is an idiot that thinks 10% return means something. He should piss off for another couple of years. 

Silvers performance exposes him as the amateur that he is.

Mon, 04/30/2012 - 03:42 | 2384454 Seer
Seer's picture

The BRICs aren't doing fine.  Their growth trajectory has broke to the downside: no, not negative, but decelerating; lots of promises made to the stirring masses, promises that'll dry up.

Physical silver, agricultural land or a business you own and run are three of the safest things to be doing.

Safest would be heading to some remote corner of the globe. :-) (but as long as drones fly I guess that this is fiction)

News flash: ag land is VERY expensive; I know, I've got some (but it was not active, and is massively overgrown- spending a LOT of energy trying to make it usable); had I went for a higher grade of land I'd be completely broke, and ag land is pretty much meaningless unless you can use it.

Lots of small businesses are failing, in which case I wouldn't equate owning a business as being safe: yes, working for someone else in these days of job cuts definitely displays increasing levels of risk.

The country that produces everything has the most options.


But seriously, the country that has the most (array of) physical resources has the most options.  And having energy is WAY BIG.  The US may be tops here, though it's meaningless if you quickly exhaust everything.

Mon, 04/30/2012 - 04:01 | 2384462 silverdragon
silverdragon's picture


BRICS are growing, unlike Europe and the US. Lumpy growth is real growth.

Land is cheap, ya just gotta get out more.

Small businessess are the best way to control your own destiny. If you are in BRIC countries or South East Asian countries, it is difficult but doable to run a successfull business.

The country that makes everything gets to win. If resources were relevant Africa, would do well.

Mon, 04/30/2012 - 04:22 | 2384469 Seer
Seer's picture

BRICS are growing

Comprehension problem?  I didn't say they weren't.  I said that their growth rate is declining.  I know that reading might not be your favorite thing to do, but for those who might like to read in order to achieve real understanding:

BRIC funds recorded $15 billion of outflows last year as the MSCI BRIC Index sank 24%, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points between November 2001 and September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman forecast the countries would join the U.S. and Japan as the top economies by 2050.

"Land is cheap, ya just gotta get out more."

I believe we were talking ag land.  They ain't making any more of it.  I suppose if you want to buy some burnt up shit in OK or somewhere in the midwest you can get cheap, but, really, how many people here can pick up and do that?

Do YOU have ag land? (I do, PLUS...)

"The country that makes everything gets to win. If resources were relevant Africa, would do well."

Africa is a country?

Based on this elongation of "country" the WORLD should win, as the WORLD has ALL the resources!

Again, you can't make squat without energy and resources.  ALL wars are about resources; yes, wars often steal people (like Nazi rocket scientists), but that's not the aim, as having people w/o resources for them to use is like baking a cake with a recipe and no ingredients.

Mon, 04/30/2012 - 03:10 | 2384437 misterc
misterc's picture

HH is very smart and had some great contrarian calls in the past. His talent is to go short something by actually being long something, in order to avoid short squeeze.

Nevertheless, how can one be long the bankrupt Western world? Society, states, companies are all up in debt to their eyebowls, rare exceptions like Apple possible though. Contrarian just to be contrarian?

Hugh, please don't brag with quotes from anno domini sixteenfortysomething. Wise man not invest in sophomoric dude.

Mon, 04/30/2012 - 03:42 | 2384456 Seer
Seer's picture


Mon, 04/30/2012 - 04:30 | 2384471 Hobbleknee
Hobbleknee's picture

Exactly.  I thought some of his comments were confusing and contradictory.


Compare silver prices

Mon, 04/30/2012 - 04:50 | 2384475 jmcadg
jmcadg's picture

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.

I believe silver will be £12800/oz physical. (400:1 paper manipulation). I believe silver could be £128000/oz physical. (when it catches up to a 5:1 ratio with gold).


Mon, 04/30/2012 - 05:00 | 2384478 Seer
Seer's picture

"When you find that you are on the side of the majority, it's time to pause and reflect."

- Mark Twain

Mon, 04/30/2012 - 05:08 | 2384483 Pete15
Pete15's picture

Damn it Hugh, stick with agriculture that makes sense. Sadly this brilliant mind may have just lost it. Id own only real assets in the USA; farmland, gold, silver, property, guns, anything of real value. USA paper no thanks, even for contrarians like Hugh I feel like that trade is getting played out. Nations need/want to diversify out of the dollar. Ill own high dividend paying stocks outside the States who dosent want a nice return every year? I used to put Hendry in with the types of Bass, Faber, Rogers, Taleb and Schiff but not after this one. Good luck Hugh.

Mon, 04/30/2012 - 05:55 | 2384507 falak pema
falak pema's picture

Reposted  :


when contrarians fall out :

How does this fit in with the perception of TD and ZH; given that HH has been an iconic Hedge funder for them.

Something is contradictory or someone is crossing their wires.

Here is the gist of it :

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.

Read more: I Know that Flakmeister, whose opinion I respect has posted a lot about the depletion gap of current liquid oil, the declining rate of frak gas production rates, and the EROEI ratios of shale and incidental non conventional discoveries. As well the high price of unconventional sources. If you take into account the increased requirements of new economies, we are in big trouble.  So this bullish analysis hits a raw nerve that is not easy to rationalise based on say Oil Drum type mathematical model extrapolations. Are we missing something BIG?

Mon, 04/30/2012 - 06:14 | 2384518 Sathington Willougby
Sathington Willougby's picture

I didn't see him recommending we buy forklifts to hoist up our dollars to the cash register.  Although I didn't read the entire musings on why he himself is so great.

Mon, 04/30/2012 - 07:26 | 2384536 NuYawkFrankie
NuYawkFrankie's picture



Guess who's back - all nice & contrary - after a 2 year hiatus?


No, Who's been on 3rd. Hugh.

Me? But I haven't been gone!

Not you! Hugh!

So, who's Hugh?

No Who is Who and Hugh is Hugh!

Didnt I just say that?

About who?

No - Who's still on 3rd! About Hugh!

So who's back - me?

No! For the last time - Hugh!!!

Mon, 04/30/2012 - 12:45 | 2385327 pcrs
pcrs's picture

It's always interesting to speculate something very unusual will happen:your fiat money gaining value

But the Volcker times were different:The us was the biggest creditor then, now the biggest debtor. Something he should at least have mentioned. Raising interest rates to 14% is different in that situation.

You could argue that raising interest rates to 1.5% in current debt world would have the same effect as raising them to 14% back then.

I do think that had I read some books on inflation back then, I would have bought gold at 800, believing hyper inflation was imminent. That would have been wildly premature. Apperantly they were able to squeeze out some decades of relative constraint.

Mon, 04/30/2012 - 15:08 | 2385983 theprofromdover
theprofromdover's picture

".. but above all, my job is to make money .."

Hugh baby, what a wretched ambition. You could amount to so much more.


Obviously you have been told by your investors to rein in your technicolor verbosity and your buccaneer spirit; now why did you listen to them, surely not to average 10% return yoy.......... At your age, Hugh? Damn few, an' yer not deid yet, so why not crank it up again.

Tue, 05/01/2012 - 19:49 | 2389684 tom
tom's picture

The bloody fool, "Silver and Gold" isn't on The Joshua Tree.

The rest I agreed with.

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