Bold hedge fund star says stellar performance nolonger enough

Date: Tuesday, December 2, 2008
Author: Steve Johnson, Financial Times

Popular legend has it that hedge fund managers are shy, secretive creatures who live in perpetual fear of the glare of media attention.

By some distance, that description does not apply to Hugh Hendry, founding partner and chief investment officer of Eclectica Asset Management, a London-based boutique.

Fresh from presenting a television documentary on the origins of the global credit crunch and fending off death threats from irate Icelanders angered by his comments about Reykjavik's banking sector, Mr Hendry is raising his head above the parapet once more.

And, contrarian to the core, his message does not make pleasant reading for an industry under fire and which is rapidly contracting as redemptions reach record levels.

"Hedge funds are destined to go from whence they came. They are going to get smaller again because the returns have been so disappointing. Most principals cannot believe they did not see [the credit crunch] coming. They are shaken to the core by the money they have lost. Their confidence has gone, their stomach for it has gone and they just don't need it. They will view this as the final straw."

Mr Hendry draws a parallel with the global investment trust industry, which was huge prior to the 1929 Wall Street crash, but has since "disappeared from the collective mainstream".

"The Goldman Sachs Investment Trust had $600m in 1929 but lost 99 per cent of its value and Goldman Sachs was still making reparations until 1967," says Mr Hendry, illustrating his belief that history is cyclical.

Indeed, Mr Hendry is unsure of his own future, despite his flagship $210m (£136m, €162m) Eclectica Fund delivering a return of 38 per cent so far this year thanks to an aversion to equities and an avaricious appetite for government bonds.

"I have achieved spectacular success but I have almost lost my business," says Mr Hendry, who established Eclectica in 2005 with partner Simon Batten when the duo left Odey Asset Management, taking the fund with them.

His gripe is that many investors jumped ship before this year when performance was steady, but unspectacular, with returns of +8 per cent, +14.2 per cent, -3.7 per cent and +1.6 per cent respectively from 2004-07 after a stellar 2003.

"Investors might say they are about not losing money, but when you do that [for them] they still withdraw their money. I manage half of what I used to manage. In order to make money this year I had to be willing to see my assets under management decline by 50 per cent," because investors chasing higher returns might redeem.

As a result he concludes forlornly: "I don't know if I have got a future as a hedge fund manager, a lot of people won't consider me because I'm so small and banks stop me out from trades."

Mr Hendry's long-standing preference for government bonds is based on a view that the global economy has long been heading for a deflationary slowdown, even when central banks were getting in a flap over inflation.

He is hugely critical of central bankers, arguing they missed a flashing warning sign when the yield on inflation-sensitive two-year US Treasuries approached the Fed funds rate in 2005 and fell below it in May 2006.

"We knew something was wrong in the US and we stopped taking risk in 2005. Inflation was always a red herring." he says. "If the two-year note falls below Fed funds it is a cast iron certainty you have to cut rates. It takes four months on average; the longest time ever was eight months in 1980/81. This time it took 18 months.

"The Bank of England has truly got this horribly wrong, but not as wrong as the European Central Bank. The ECB will be damned by history. [ECB president Jean-Claude] Trichet is damned, he has gone from the FT's man of the year to criminal of the year. Raising rates [in July 2008] is a decision that the citizens of Europe will pay for with their jobs." For the present he favours eurozone government bonds, believing that is where deflation is most likely, although he is doubtful the 15-nation currency union will ultimately hold together.

Perhaps unsurprisingly, Mr Hendry's air of gloom means he remains bearish on equities. His studies of long-term cycles lead him to conclude US equities, which are back where they were 10 years ago, could remain in the doldrums for another 15 years.

His selection criteria for the equity elements of Eclectica's long-only global and continental European funds are disarmingly simple: "If you can't eat it, you can't drink it, you can't smoke it or find it in your bathroom, then you cannot find it in our portfolios," he says.

However, there are some strategies he is upbeat about. In July Eclectica launched an innovative UK Relative Momentum Fund, based on the premise that stocks that outperform in one period tend to do so in the next, a thesis backed earlier this year by analysis of global equity returns since 1900 conducted by academics from the London Business School. "The only investment strategy that seems to succeed over time is momentum," says Mr Hendry, who claims the fund is a first for Europe.

He is also bullish about agricultural commodities, foreseeing a "monster" commodity bubble in the next decade as the long downward slide in real food prices, notwithstanding the recent spike, reverses. Eclectica has its own agriculture fund, managed by Espen Baardsen, a former Tottenham Hotspur and Norwegian international goalkeeper.

Since he seems so well suited to the role, it seems a pity Mr Hendry entertains concerns about how long he will manage to stay in business.

"My report card when I was a six-year-old said 'this kid worries', so at least I chose an occupation where you get rewarded for that," he confesses.

Curriculum Vitae

Hugh Hendry

Born: 1969

1986: University of Strathclyde, Accounting & Economics

1990: Investment manager, Baillie Gifford

1998: Associate director, UK equities, Credit Suisse Asset Management

1999: Fund manager, Odey Asset Management

2002: Partner, Odey Asset Management

2005: Founding partner and chief investment officer, Eclectica Asset Management

Eclectica Asset Management

Established: 2005 by Hugh Hendry and Simon Batten, two ex-partners of Odey Asset Management Assets under management: $600m in one hedge fund and five Ucits funds Headquarters: London

Employees: Six partners and seven other employees