Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.


Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."


Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:



We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

Summary of Hedge Fund Bearish China Thesis: Kynikos, Corriente, Pivot, Eclectica, Greenlight & More

Today we're posting up a .pdf entitled "Global Macro Hedge Funds: Emerging Perspectives on China."  It essentially outlines the bearish China thesis held by numerous well known hedge funds.

The research summarizes viewpoints from the following managers and we've extracted some of the perspectives below.

Jim Chanos' Kynikos Associates: "Chanos cites several factors which he considers to be predictive of (a collapse of the Chinese economy), including the country's economic dependence on new construction, which accounts for 60% of China's economy (versus 10-15% in western nations) and which is fueling demand globally for industrial commodities, particularly in Australia, Brazil and Canada.  Mr. Chanos has stated that China's reliance on property development to produce nearly the entirety of the country's economic growth, rather than appreciable growth in exports and domestic demand, is without historical precedent and is ultimately unsustainable."

We've recently posted Chanos' bearish view on China and have called attention to his short of Fortescue Metals in Australia.  And then longtime readers will recall we posted Chanos' hour long presentation on China back in 2010.


Mark Hart's Corriente Advisors: "Mr. Hart has publicly stated his assessment, based upon his team's research, that China is generally misperceived (and therefore mispriced) as a perpetual 'economic miracle,' when in fact the reality is that the country's economy is a credit-fueled bubble."

At last year's Ira Sohn Conference, we posted some notes from Hart's talk on China.


Hugh Hendry's Eclectica Asset Management: "Mr. Hendry identifies parallels between the present situation in China and that of Japan in the 1920s when economic imbalances ultimately caused the entire system to collapse and foresees 'a dramatic collapse' of the Chinese economy as the inevitable result of the inherent instability resulting from massive debt growth to fund infrastructure projects which is 'unprecedented in 400 years of economic history' in conjunction with a structurally flawed political economy in which gross domestic product growth is not matched by domestic wealth creation."

You can read about Hendry's Asian bear portfolio he constructed.


Pivot Capital Management: "Three principal reasons for their perspective on China's pending economic downturn: 1.  China's expansion cycle has already greatly surpassed all prior global capital investment cycles; 2. Recent economic growth is not sustainable and is predominantly the result of massive fiscal stimulus, concomitant with a surge in the growth of credit, none of which is sustainable; and 3. China has substantial overcapacity in virtually every industrial manufacturing and infrastructure sector, causing declining marginal returns on investment."


David Einhorn's Greenlight Capital: At the Ira Sohn Conference this year, "Mr. Einhorn presented a markedly negative perspective on China, stating that China is misunderstood and is not an investment opportunity.  He stated that capital flight has already started and that money is leaving the country, noting the slowdown in export growth and how inflation has tempered the influx of hot money."


Embedded below is the complete summary of hedge funds' bearish China thesis in a 44-page comprehensive document:  






For more hedge fund views on China, we've highlighted the debate between Xerion's Dan Arbess and Jim Chanos in China: bubble or bonanza?

We've also posted previous resources such as Vitaliy Katsenelson on China: the mother of all black swans.

What Hugh Hendry of Eclectica Asset Management Has Been Buying

Barron's has a great interview with Hugh Hendry of Eclectica Asset Management. His flagship fund returned 12% last year mainly by investing in the short end of interest rate curves and he now manages $700 million.

On what Hendry owns currently:

"In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment."

His hedge fund has established a bearish Japanese bet by buying protection on steel names and businesses sensitive to the yen. He's also bought credit protection on the shipping industry in Japan such as Mitsui OSK (TYO:9104).

Additionally, Hendry mentioned he's got protection on companies levered to the global economy such as Sumitomo (TYO:8053) and Marubeni (TYO:8002).

To see what else he's been up to, be sure to check out the rest of Hendry's interview at Barron's.

And for more on this hedgie, be sure to read Hendry's past views on hyperdeflation; something he's still talking about these days.

Hugh Hendry's Eclectica Fund Sees Hyperinflation Via Deflationary Event; Constructs Asian Bear Portfolio

Hugh Hendry just released the May market commentary from his Eclectica hedge fund (see below). We haven't checked in on Hendry since his March update when we saw he liked Annaly Capital Management (NLY), but his time around we get much more in-depth macro commentary. Hendry has compiled eleven pages worth of insight complete with charts, pictures of Chairman Mao, and even lyrics from the band Gorillaz. The main takeaway from his commentary though is that he sees hyperinflation in store as sovereign entities will need to pay off their overwhelming debts via 'worthless fiat currency.' However, for this to occur, he argues that first we need to see a large deflationary event.

Curiously enough, Nassim Taleb mentioned this sort of scenario at an investment panel where Hendry was a speaker as well. Taleb presented the idea that if you were creating a portfolio today you should allocate a tiny portion to insurance against hyperinflation. If the scenario doesn't unfold, your cheap insurance expires worthless. However, if it does occur, your investment returns an exponential amount. We just yesterday detailed how legendary fund manager Seth Klarman is worried about inflation and has bought insurance to hedge this risk.

Turning back to Hendry's recent commentary, he writes that, "it is now commonly accepted that the magnitude of the financial problems confronting the world economy are so great that in all likelihood we will be confronted by a hyperinflation allowing sovereign debts to be paid off in worthless fiat currency. Just like the Bolsheviks in 1918 and 1919, the machine-gun of the Comissariat of Finance will pour fire into the rear of the bourgeois system. We do not dispute this outcome."

So, what would that deflationary event be that serves as a catalyst? His Eclectica Fund has essentially outlined two 'game changing' scenarios: 1. China's rate of economic growth slumps and 2. The Japanese Yen suddenly appreciates and bankrupts its domestic export base.

How has he positioned his portfolio for such a scenario? Hendry has built a short credit portfolio, "made up of over twenty single-name industrial, cyclical businesses which have the dubious distinction of suffering from gigantic financial leverage and Asian/commodity overdependence. Without a doubt, some of these businesses will not survive; others will have to be radically overhauled and restructured and we will make money." So, let the guessing game begin as to which individual names he's referring to.

Their aptly dubbed Asian bear portfolio is 3.5x short the fund's NAV and has a maximum loss of 8.5% and a maximum potential gain of 250% (if some of their names go bankrupt). In terms of other portfolio positions, the Eclectica Fund has seen strong performance from its European sovereign CDS positions as well as some of their interest rate 'swaptions' in the UK, Australia, and New Zealand. Lastly, Hendry mentions that since the Chinese have started to import corn, this could possibly be the birth of a new trend. Regardless though, he feels corn trading at $3.60 per bushel is too cheap and has started to build a position there as well.

Hendry is by far one of the more entertaining (and contrarian) fund managers out there these days and his macro insights never fail to leave you without contemplation. While we won't spoil the fun by telling you which Chapter Hendry is profiled in, suffice it to say that he certainly makes a lasting impression in Steven Drobny's recently released book, The Invisible Hands: Hedge Funds Off the Record.

Embedded below is the May market commentary from Hugh Hendry's Eclectica Fund:

You can download a .pdf by clicking here.

So, the inflation versus deflation debate wages on. While the vast majority of fund managers we cover on the site have had an inflationary bent, we know Hendry has been in the deflationist camp for a while now. Broyhill's Affinity hedge fund recently outlined ten reasons to buy bonds and Hendry would most likely agree with some of the rationale given that he doesn't think interest rates will rise anytime soon.

We've been posting up a bunch of the latest hedge fund investor letters, so make sure you check out insight from the following managers:

- Louis Bacon's Moore Capital Management

- Ricky Sandler's Eminence Capital

- David Einhorn's Greenlight Capital

- Jay Petschek's Corsair Capital

- Kyle Bass' Hayman Advisors

And for our past coverage on Hendry, be sure to check out his thoughts on how to invest $100 million. And as always, to prepare for either outcome, head to a previous post on investment scenarios: inflation versus deflation.

Hugh Hendry's Eclectica Likes Annaly Capital Management (NLY)

Today we're covering the latest updates out of Hugh Hendry's Eclectica Absolute Macro Fund and their CF Eclectica Europe Fund as well. They recently posted up their February 2010 letter and we get some insight as to what they're investing in and how their portfolio is allocated. They've definitely made some position adjustments since the last time we looked at their portfolio.

Their commentary highlights their new addition of Annaly Capital Management (NLY) to the portfolio. They like this position because it has a dividend of 17% but point out that it does come with risks, including the possibility that the Fed aggressively raises interest rates (which would negatively effect NLY's business). This play sticks with Eclectica's overall theme that inflation is not a worry here and they see the Fed keeping interest rates low longer than many anticipate. Hendry is more worried about deflation than anything and he thinks Annaly is a safe play in the mean time because he does not anticipate an aggressive rise in interest rates. For more thoughts from Hendry, check out his insight from a recent investment panel.

We see that Eclectica's Absolute Macro Fund top 10 holdings are as follows:

1. Long EUR/short EEK: 21.8%

2. Long EUR/short LVL: 14.5%

3. German 30 year government bond: 10.3%

4. Annaly Capital Management (NLY): 5.1%

5. Long USD/short KRW: 2.7%

6. long USD/short ZAR: 2.4%

7. long USD/short AUD: 2.1%

8. long USD/short GBP: 2.1%

9. MetroPCS Wireless 9.25% 2014: 2.1%

10. British American Tobacco: 1.6%

As you can see, their top 3 holdings are highly concentrated and their brand new NLY stake is pretty sizable. Embedded below is Eclectica's Macro Fund February update and you can directly download the .pdf here:




Additionally, we wanted to post up an update from their CF Eclectica Europe Fund as well. That is embedded below and you can see their brief commentary and top 10 holdings as well, with a downloadable .pdf here:




Always intriguing to see what Hugh Hendry is up to with his various investment vehicles. For more on Hendry's funds, we've posted up some past Eclectica commentaries. Be sure to also check out his take on how he would invest $100 million as well as BBC's recent video of a day in the life of Hugh Hendry, which many of you no doubt will find amusing.

Hugh Hendry's Eclectica Fund Update

Today we present you with Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. For those unfamiliar with Hendry, he has become sort of a resident deflationist and has been an advocate of long treasuries positions. Prior to founding Eclectica in 2002, he was a partner at Odey Asset Management. He definitely seems to be a contrarian here as the Eclectica Fund finished 2008 up 31.2%, finished 2009 down 8.0% and through January 2010 was up 3.7%. Their gains this year have stemmed from their fixed income positions.

In terms of recent portfolio activity out of the Eclectica Fund, Hendry notes that they sold over half of their 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. You can directly download the .pdf of Eclectica Fund's recent performance attribution here.

Hendry's other fund (Absolute Macro) aims to "achieve positive returns through strategically allocating capital across multiple asset classes on a global basis." We got a glimpse at the Absolute Macro Fund's Top Ten Holdings:

1. Currency: Long EUR / Short LVL: 19.8%

2. Australian 10 year government bonds: 7.4%

3. German 30 year government bonds: 7.1%

4. MetroPCS Wireless 9.25% 2014: 2.9%

5. Long USD / short GBP: 2.8%

6. Imperial Tobacco: 2.6%

7. British American Tobacco: 2.6%

8. Altria Group: 2.5%

9. Lorillard: 2.5%

10. Philip Morris International: 2.4%


Obviously, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.


Attached below is the Absolute Macro fund's commentary:



You can also download a .pdf directly here.

So, a brief but interesting look into what Hendry has been up to as of late in his various investment vehicles. Obviously though, you'll want to focus on the moves out of the Eclectica Fund as that's where he devotes most of his time and where most of his net worth is tied up. If anyone has access to Eclectica Fund's most recent commentary, please get in contact with us as we're trying to track it down. For more insight from Hugh Hendry, check out his take on how he would invest $100 million at a recent investment panel. Previously, we've also posted up some past Eclectica Fund commentary if you want to check that out as well.

Eclectica Fund: Hugh Hendry's November Commentary

Today we've got Hugh Hendry's latest market commentary through his Eclectica Fund November investor letter. We often feel it's pertinent to examine both sides of the argument in any given situation. Not to mention, there are always 'two sides to a trade.' One of the main arguments engulfing financial markets has been the inflation versus deflation debate. Hugh Hendry has been our resident deflationist as we've covered his thoughts numerous times. While many of you may not agree with his thoughts, it's at the very least worth the time to weight the other side of the argument, as Hugh seems to be a contrarian in many of his plays. Not to mention, he is in good company with his deflationary stance as PIMCO's bond king Bill Gross has bet on deflation as well.

Hugh was recently out in the media saying that the market was 'all one trade' and was too crowded for his taste, as we detailed in our hedge fund news update. In his November commentary, Hendry again focuses on the latest market action as a 'rally in inflationary assets.' He notes that it is essentially all one trade: long emerging markets, long commodities, short the US dollar, etc. In the end, they are all tied to inflation. His letter then goes on to focus on why this rally could be a fake and we recommend reading his thoughts in their entirety below.

This is interesting mainly because so many hedge funds we track have been putting on curve cap plays and have been betting on inflation through various instruments. Many funds have even gone long copious amounts of gold, as they seek to hedge themselves from the printing presses of governments that are devaluing fiat currency. As such, Hugh's stance is a departure from the norm we've seen from many hedge fund managers here on the blog.

Embedded below is Hugh Hendry's Eclectica Fund November Commentary. RSS & Email readers come to the blog to view it:



Also, you can download the .pdf here.

For more from Hugh Hendry's Eclectica Fund, definitely check out his past market commentary here, as well as here. As always, we'll cover Hendry's thoughts as he continues to divulge them. Because after all, it's always prudent to examine both sides of the argument. And for those of you continuing to examine this debate, check out this post examining commodity inflation versus asset deflation.

Hugh Hendry's Eclectica Fund August Commentary

Many of you may have already read this, but we found it prudent to post up the latest from Hugh Hendry's Eclectica Fund. The resident deflationist is back with his August 2009 commentary and you can read it below. As we noted in our hedge fund news update recently, Hendry sees a very crowded trade in that so many people are confident inflation is in our future. You can also view Hendry's previous letter here.

Without further ado, Hugh Hendry's Eclectica Fund August 2009 Commentary (Email readers will need to come to the blog to view the embedded document, or you can attempt to download the .pdf via this link):

Eclectica August Commentary

Hugh Hendry Eclectica Fund Investor Letter

Here's the latest commentary from Hugh Hendry over at Eclectica Asset Management. Big hat tip to Zero Hedge for posting this great read up. RSS & Email readers will need to come to the blog to view the slide-deck.

Also, a tip for those of you wanting to print the document off rather than reading it in the .pdf displayer: don't print it directly from Scribd, the margins will be screwed up. Since numerous readers have had problems with this, we wanted to post up a quick remedy. Click on the Scribd logo so that it takes you to the document on Scribd's site. You will then have the option to download the .pdf. After you've downloaded it, just print it from your computer. Note that this tip works for all Scribd and Docstoc .pdf documents we upload here on Market Folly. This way, you can avoid print-outs with messed up margins!