Hugh Hendry: "The Invisible Regime... Has Become Unhinged"

Tyler Durden's picture


From Hugh Hendry, CIO of The Eclectica Fund.

This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets.

Towards the end of May, however, the Fund experienced a sharp rise in its volatility from an annualised rate of 4% to 7%. The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged.

The catalyst came from the announcement that the US Federal Reserve may soon tighten its monetary policy following yet another better than forecast US employment figure. The jobless rate in America is down to a four-year low. This purported change of policy however created a chain reaction that spread across global financial markets.

As cross-asset correlations rose, the Fund became less diversified. This necessitated that we reduce our risk exposures across all trades; G10 receiver trades and Japanese and low variance equities were closed completely as their severe price reaction challenged their intermediate up-trends.

As a consequence, the Fund fell by 2.1%. The main negative contributors were the short-end interest rate swaps and afore-mentioned equities, offset by modest gains from FX positions as the dollar strengthened and volatility trended higher in EM currencies.

In the Far East, by contrast to the bullish American outlook, the evidence of an economic slowdown in China continued to mount and commodity exporting countries that rely heavily on sales to the Middle Kingdom came under heavy selling pressure. China accounts for 27% of total Australian exports, mostly raw materials, and the country finds itself in China's slipstream. Unfortunately, in a break with the recent past, it was the currency markets, and not our 3yr interest rate contracts, that benefited the most from the move. The Australian dollar recorded its seventh worst monthly performance (-7.7%) of the past 20 years. But instead of enjoying some of this move, the spectre of tighter US monetary policy contaminated the outlook for rates globally and our 2y1y swap positions rose rather than fell costing the Fund 57bps.

In Japan, rising bond yields were also the culprit. Volatility surged as Japanese 10-year rates went from 30bps to trade over 1% at one point in May, before closing at 0.85%. As it costs the government about a quarter of its total tax revenues just to pay the interest on its debt at current levels, the unsettling disorder in the bond market was rapidly interpreted as a threat to public finances and GDP growth. Japanese stocks saw heavy profit taking with the TOPIX recording a 17% slide in late May. The Fund recorded a loss of 31bps from Japanese equities.

Heading into June, we retained a slightly larger short China position, we boosted our long position in the US dollar and re-directed it to reflect an outright short of emerging market currencies.

We also transformed our Australian rates trade into a bullish curve steepener (that is to say, we added a short ten year leg). A similar position was initiated in Korea. These countries remain unique in having a developed world FX profile and overnight rates which remain high by international standards, giving the authorities considerable leeway to cut overnight interest rates. Ten-year rates, however, are liable to be dragged higher by US Treasuries. So if the respective central banks do react to the slowdown evident in China by cutting short term rates, this could give rise to further steepening.

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Wed, 06/26/2013 - 11:56 | 3695223 FieldingMellish
FieldingMellish's picture

Fucker is a mine shorter.... fuck him even if he is right.

Wed, 06/26/2013 - 11:57 | 3695232 catacl1sm
catacl1sm's picture

Hugh Hendry, bitchez!

Wed, 06/26/2013 - 11:58 | 3695239 Pladizow
Pladizow's picture

Ah, yes, finally, my Hendry Fix.

Bass had to do for a while, but still the withdrawals were wicked!

Wed, 06/26/2013 - 12:11 | 3695330 Silver Bug
Silver Bug's picture

The regime is literally blowing apart in front of our eyes.

Wed, 06/26/2013 - 12:00 | 3695251 havin' thangs
havin' thangs's picture

Off topic but can somebody recommend a good options brokerage? I'm tired of paying scottstrade $15 each way.

Wed, 06/26/2013 - 12:07 | 3695276 francis_sawyer
francis_sawyer's picture

Go with the squid... [lol]... They'll be happy to put you on any side of any trade you want... Size doesn't matter... The bigger the better...

Wed, 06/26/2013 - 12:09 | 3695320 Al Huxley
Al Huxley's picture

Yes, they'll fuck you from the front, from behind, tied up hanging upside down - any side you want.

Wed, 06/26/2013 - 12:45 | 3695528 Uncle Remus
Uncle Remus's picture

Dylan did a song about that didn't he?

Wed, 06/26/2013 - 13:18 | 3695709 12ToothAssassin
12ToothAssassin's picture

I got an apendectamy so I could make some money on the side...

Wed, 06/26/2013 - 13:45 | 3695898 FEDbuster
FEDbuster's picture

Interactive Brokers seems to be the cheapest broker to place your bets in the casino, the house takes about $2 per bet depending on size of bet.

Wed, 06/26/2013 - 13:05 | 3695625 Thisson
Thisson's picture


Wed, 06/26/2013 - 13:54 | 3695952 There is No Spoon
There is No Spoon's picture

Interactive Brokers

Lightspeed Trading

Wed, 06/26/2013 - 14:18 | 3696078 justinius1969
justinius1969's picture
$15 each way wtf..

what products are you trading?

Wed, 06/26/2013 - 12:00 | 3695255 deKevelioc
deKevelioc's picture

I like it better when Hendry goes live to pummel some fraud from the Wilson school.  I'd pay $5 to see Hendry slam Krugman.  Wouldn't you?

Wed, 06/26/2013 - 12:07 | 3695294 Tinky
Tinky's picture

I'd pay $6.50

Stiglitz is still suffering from nightmares as a result of his televised encounter with Hendry.

Wed, 06/26/2013 - 12:02 | 3695256 NidStyles
NidStyles's picture

Maybe it's the lack of sleep but this article seems to be speaking about two distinctively different outcomes from the same set of conditions.... Not really sure how he came about that...

Wed, 06/26/2013 - 12:08 | 3695311 cossack55
cossack55's picture

Figured you would be used to doublespeak by now.  Unless of course, you live in Iceland or Bhutan.  Hmmmmmmmm?

Wed, 06/26/2013 - 12:18 | 3695367 NotApplicable
NotApplicable's picture

You're not supposed to connect the dots!

Besides, it just means he can appear right at some point in the future, all while ignoring the wrong.

I knew a local gov. treasurer guy who would put on contradictory rate swaps, then issue press releases about the winning side when it looked good.

Hedging, Bitchez!

Wed, 06/26/2013 - 14:48 | 3696212 Reptil
Reptil's picture

quantum market bitchezz

Wed, 06/26/2013 - 12:02 | 3695263 slaughterer
slaughterer's picture

At some point, the EM FX short will blow up. 

Wed, 06/26/2013 - 12:08 | 3695312 gjp
gjp's picture

Bullish on America and bearish on EMs is all wrong, even if it's working.  America is in imperial decline and it is the greatest fiat abuser in the world (maybe tied with Japan here, but at least they still make stuff ...)  It's sick that this is 'the play'.  That's what sophistry gets you.

Wed, 06/26/2013 - 12:21 | 3695386 Midasking
Midasking's picture

Fed is modern day coin clipper. People used to go to jail or worse for that... now it is called stimulus? I'm confused.

Wed, 06/26/2013 - 12:03 | 3695273 Mike Cowan
Mike Cowan's picture

Mourning Becomes Electica.

Wed, 06/26/2013 - 12:04 | 3695278 LetThemEatRand
LetThemEatRand's picture

Short version of this article:  "the markets are bat shit crazy and completely manipulated and we lost money because we bet on red instead of black this time around, but we'll get it right next time because we're pretty sure the guy at the roulette table has his finger on the button to make it stop at red next time."

Wed, 06/26/2013 - 12:07 | 3695301 prains
prains's picture

somebody slipped a benny in the drink too

Wed, 06/26/2013 - 12:05 | 3695284 astoriajoe
Wed, 06/26/2013 - 12:10 | 3695324 prains
prains's picture


and thanks for taking me to anon's up load site, i can feel the red dot at the base of my skull

Wed, 06/26/2013 - 12:25 | 3695406 BandGap
BandGap's picture

He looks like Snowden + 20 years.

Wed, 06/26/2013 - 12:27 | 3695414 NipponMarketBlog
NipponMarketBlog's picture



Regarding Japan: " the unsettling disorder in the bond market was rapidly interpreted as a threat to public finances and GDP growth."

I am pretty sure that wasn't the reason the Japanese equity market sold off, and the "threat to public finances" is hardly something to have come out of the blue:

Wed, 06/26/2013 - 12:32 | 3695444 disabledvet
disabledvet's picture

blow outs at the long end say to me this is a very perilous time to have money in anything other than cash and "cash equivalents" unless of course you are a professional money manager and must be invested (for the record i am not but i'm invested anyways.) gold has crashed almost 33% in price since it's high of around 1900 bucks and ounce. silver was heading to it's under 20. that's a FIFTY percent "correction." as interest rates SOAR on this news the consequences must be...certainly are here in the States...massive default risks across the totality of the Continent. coal mines continue to be shuttered, banks continue to fail, treasuries have sold off dramatically...but off of the lowest yields in history. banks are not lending "due to lack of demand" and so obviously municipal finance remains in grave danger. the dollar has surged because the US consumer has simply...stopped consuming. there is a shortage of dollars across the entire financial landscape...this causes money to move to equities "where dollars can be had in the first place" (by for example investing in a company that gets oil out of the ground and selling it) and while i still expect a sell off i expect money to continue to park itself in equities. but i also believe strongly that treasuries represent a good trade here. the recovery has stalled, housing is clearly back sliding, collapsing commodity prices represent a clear and present danger of DEFLATION...the Fed is on the record as saying that what it wants to fight (via the dual mandate) seems rather odd having been so successful at it for the last 4 years that the Fed would now reverse itself so totally but that strikes me as treasury bullish too. i'm losing (some) money here but i'm kind of agnostic on the whole thing actually. i really don't feel there are any INVESTORS really interested in the pro growth investing sytle. it's all about incomes for the bulk of the investor class...but the winner has been capital appreciation ever since 2008 and the Fed's response to it. by definition capital appreciation represents a competitive threat to the existing "order" if you will as simply put the folks making money in that space (Tesla, Amazon, netflix, pandora, google, etc...etc) have already found a better way to do that than the existing "incumbents." so sure....Ford, Wal Mart, Time Warner, sirius, microsoft...they're already behind the curve when it to competing with "the new kids on the block." i would be very wary of sitting on the widows and orphans plays here. natural gas utilities look good because they're not nuclear and they're not "stuck on the grid" which looks to me to be an (expensive) thing of the past right now. as with any race there are backs and forths but i see nothing to say...even with unemployment where it's at right now...that we've achieved nirvana here. with the Fed now say "7% is really the right level of unemployment" sounds completely ridiculous to me. why not ZERO percent unemployment? of course no politician has spoken out on such matters so "let's get that unemployment thing back to 12% and call it a day" i guess. it's not like EMPLOYMENT has moved at all.

Wed, 06/26/2013 - 12:52 | 3695559 Solarman
Solarman's picture

Outstanding summary

Wed, 06/26/2013 - 12:57 | 3695585 Tinky
Tinky's picture

Only if you don't believe in the value of paragraphs.

Wed, 06/26/2013 - 12:37 | 3695450 Peter Pan
Peter Pan's picture

If the system goes belly up will any of these guys actually collect on the bets they have made or will they be left clutching a piece of paper in one hand and their ........ In the other?

It's a serious question and I am not trying to be smart.

Wed, 06/26/2013 - 12:51 | 3695555 Things that go bump
Things that go bump's picture

See Creditanstadt event.

Wed, 06/26/2013 - 13:47 | 3695909 Peter Pan
Peter Pan's picture

Ah yes. Thankyou. I had forgotten about the creditanstalt.

Wed, 06/26/2013 - 19:05 | 3697173 Totentänzerlied
Totentänzerlied's picture

Depends on their creditor status, position in the collateral chain, size of positions, counterparties' exposure, etc. Mostly, how early they sell, before the herd or with the herd.

A handful will make it out in time. The rest will get slaughtered.

Wed, 06/26/2013 - 12:47 | 3695508 Uncle Remus
Uncle Remus's picture

Maybe the squeaking will stop now.


[strokes bar of precious next to mouse]

Wed, 06/26/2013 - 12:49 | 3695547 Kreditanstalt
Kreditanstalt's picture

Does any of this financial chicanery and gobbledegook actually PRODUCE any real tangible WEALTH?

Wed, 06/26/2013 - 13:44 | 3695880 Peter Pan
Peter Pan's picture

Only for those perpetrating the financial chicanery and goobledegook. Their clents may well lose their pants but the money managers will fill their pockets with commissions.

Wed, 06/26/2013 - 19:19 | 3697206 Grimviewer
Grimviewer's picture

Hugh Henry is shite...+1.4% year to date is bollox...I'm up 7.2% ytd here's my half yearly report...


With all the doom and gloom surround equities at the start of the year and the continous barrage of negativity spewed forth by armagedonnites on Zerohedge, positions were initiated in 1 US smart beta etf,1 global long short equity hedge fund based trust of investment trusts exhibiting low beta income and growth trust with relatively high alpha to low volatility 1,international trust with a low uk bias and high alpha over 10 years 1 senior secured loan finance fund, 1 asia pacific etf with a large bias to Australian banks and 1 frontier markets fund.all pay healthy growing  divs with good cover.Cash is currently 40% which will be deployed as opportunity arises. currently monitioring em/china markets for a cheap entry after current rout subsides this may take some time.looking to top up long short fund and eyeing an investemnt trust with a large holding to uk based cta alogarithm also seeking small cap fund exposure on any deeper pullback.



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