Hendry: ‘Bad Things are Going to Happen’

Date: Wednesday, July 18, 2012
Author: Robert Cookson, CNBC

Hugh Hendry is lying low. The Glaswegian founder of $800 million hedge fund Eclectica stepped out of the limelight last year after a series of feisty television appearances made him Britain’s best-known hedge fund manager.

In a debate on “Newsnight” in 2010, Mr. Hendry told Joseph Stiglitz, the Nobel laureate economist, “Um, hello? Can I tell you about the real world?” And, after a pugnacious appearance on the BBC’s “Question Time,” he briefly became the most-talked about person on Twitter.

For the genteel, wealthy investors in his funds, it was all a bit too much. So Mr. Hendry stopped all media appearances and concentrated on making money. His $460 million flagship fund gained 12.1 percent over 2011 and is up about 3 percent so far this year. It has returned a compound annual growth rate of almost 10 percent since inception in 2002, performing best during bear markets.

“What I found was that when I speak in person, and especially when it’s television and timing is so acute, it gives the impression that I am cavalier and, if you will, full of myself,” says Mr. Hendry, speaking by phone from his office in Bayswater, central London.

“The danger when people look at that from a distance is that they try to align that with the guy that they’ve just given $50 million or $75 million to and it’s not the same person.”

In the interests of Eclectica, Mr. Hendry says he put on hold his “one-man campaign” to convince a skeptical public that financial speculators play a beneficial role in a free-market economy.

He adds that Paul Taylor, who joined Eclectica as chief executive in January 2011, “came in with provisions that he would accept the role if I cut back on the media thing and made it more professional.”

But Mr. Hendry has not fully retreated from public life. In May, he penned an article for the Financial Times in which he compared the state of the hedge fund industry to the “plight of the banana.”

“Today the world eats predominately just one type of banana, the Cavendish,” he explained, “but it is being wiped out by a blight known as Tropical Race 4, which encourages the plant to kill itself.”

The month before, Mr. Hendry sent investors his first letter since the winter of 2010. In it, he predicts “financial anarchy” and explains how his investment approach differs from his peers.

“I suspect that I am one of the few chief investment officers 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.”

So what does Mr. Hendry believe?

At the Milken Institute conference in May, he told the audience that France was just a year away from nationalizing its banks and that politicians had still not faced up to the scale of the global debt bubble that was now imploding.

“We have reached a profound point in economic history where the truth is unpalatable to the political class — and that truth is that the scale and magnitude of the problem is larger than their ability to respond — and it terrifies them.”

Three years after Mr. Hendry posted videos on YouTube of his visits to Chinese “ghost” towns, he remains pessimistic about the Middle Kingdom. He is shorting the equity of Chinese state-owned enterprises, balanced by a long position in a basket of Asian non-discretionary consumer stocks.

He is also using credit default swaps  to bet against the debt of financially leveraged Japanese companies such as Toshiba, which he believes are particularly exposed to a Chinese slowdown.

Mr. Hendry insists that his reputation as a “contrarian” investor is wrong, and that his approach is in fact to take advantage of the prevailing momentum in markets. “Our ideas are harshly disciplined by market trends. You will never see us pursue a homegrown idea when it is to the detriment of the prevailing trend.”

For example, he reckons US government bond yields, already at record lows, will continue to fall. And, although he professes not to be a contrarian, he is more optimistic about the US than many investors and is “long the debt-saddled west and short the vastly over-vaunted and over-owned” Bric quartet of Brazil, Russia, India and China  .

He believes that financial markets are single-digit years away from a crash that will present investors with opportunities of a lifetime. “Bad things are going to happen and I still think the closest analogy is the 1930s.”