November 25, 2013

'I can't look at myself in the mirror': Hendry reveals why he has turned bullish

Eclectica hedge fund manager Hugh Hendry has said he has been forced to leave his bearish outlook behind as he faces up to a market “which only makes sense through the prism of trends”.

Speaking at Harrington Cooper's 2013 conference this morning, Hendry (pictured) said he is no longer fighting the "two-way feedback loop" which is continuing to boost risk assets.

That centres on the currency war being played out between the US and China, in which US QE prompts dollar-denominated investment to head to China, and China fights the resulting upwards pressure on its currency by manufacturing an investment boom.

Hendry said this creates a "global supply glut", leading to falling US inflation expectations (as this supply far outweights US domestic demand) - which in turn prompts the Federal Reserve to loosen policy once again.

"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out," Hendry said.

"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."


Hendry said he is looking for ‘auto-correlations' that benefit from this feedback loop.

Though he first began turning more positive on the likes of US and Japanese equities last year, Hendry suggested this morning the current environment created more counter-intuitive opportunities.

"This applies to European banks, Greek equities, Spanish equities. You have got to be in things that are trending," he said.

The manager's Eclectica Absolute Macro fund had a 64% value at risk equity allocation in September, up from 45% in August, with December 2013 Japanese TOPIX index futures his biggest single holding on a VaR basis.

Addressing attendees this morning, Hendry said his comments would take on a "confessional" tone, and admitted his performance over the past year had been "at best, mediocre".

Hendry's CF Eclectica Absolute Macro fund has lost 2.6% in the nine months to 30 September, according to the firm.

Risks to his reputation

The manager acknowledged his changing stance may be viewed by some investors as a 'top of the market' signal, but said he is not concerned by the prospect of a crash.

"I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year."

"Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."

Hendry said he retains a degree of safety within his portfolio by hedging out his bullishness through trades such as high beta US stocks versus emerging market stocks.

"There is the constant danger that Western bankers turn bullish again, start leveraging up, and we see money go into productive assets, not financial assets," he said.

"If that happens and the Fed does tighten policy [as a result], it will just be really bad news for emerging markets."


Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."