Stock Markets May Trade Sideways for 15 Years: Hendry

Date: Monday, November 24, 2008
Author: Laurence Fletcher, Thomson Reuters

Stock markets may remain stagnant and trade sideways for over 15 years, according to hedge fund manager Hugh Hendry, who believes many large mutual fund firms could disappear as a result.

Hendry, partner and chief investment officer at Eclectica Asset Management, also said that poor performance from hedge funds and private equity could leave both industries as niche, little talked about asset classes in the future.

So far this month, Mr. Hendry's 146.2 million euro ($183 million) Eclectica fund is up an estimated 12.2%, after a 49.8% rise in October. In the first ten months of the year the fund is up 27%.

"The stock market could oscillate or go sideways for a period as long as 25 years, from 10 years ago," Mr. Hendry told Reuters in an interview late on Thursday [Nov. 20]. "We've got another 15 years of markets rising, falling and going sideways."

On Thursday the S&P 500 stock index fell 6.7% to its lowest level since 1997. The fall, which takes the S&P to more than 52% below its October 2007 record high, makes the current bear market the second biggest on record, exceeded only by the 83% drop between 1930 and 1932, according to Stock Trader's Almanac.

Mr. Hendry said that as a result of markets making no money for investors in nominal terms, many long-only fund firms which measure their performance relative to stock market indices, rather than in absolute terms, could disappear.

"You're going to lose so many large, long-only institutional managers," he said. "Over 30 years, when the Dow went from 700 to (nearly) 14,500, the principal risk was keeping up with the index. But benchmark risk is going to be the ruin of your business."

He also said poor performance by hedge funds and private equity at a time when many investors expected them to make money could leave them as niche, overlooked sectors in future.

This year the $1.7 trillion hedge fund industry is delivering record poor performance, down 16.05% in the first ten months, according to Hedge Fund Research.

"The hedge fund industry and private equity industry seem to be very, very comparable to the investment trust sector in the late 1920s—unregulated, quite leveraged," he said. "People don't talk about them (investment trusts now) because they (messed) up so badly in a pivotal moment in their history. I fear for private equity and hedge funds it will be something similar."

Mr. Hendry said he was looking at buying super senior bank loans but had not done anything yet as they could fall further.

"We had our first credit meeting in a long time. We're looking at buying bank loans, super senior," he said. "There's one or two we might dabble…. But I'm waiting."

He also said he had cut back leverage on his bet on interest rate swaps—which he describes as the fund's highest conviction trade ever and which made most of his gains in October—and continues to favor government bonds in the short-term.

By Laurence Fletcher