Hugh Hendry is out with his commentary for August. The hedge fund managed by Hugh Hendry had a flat month in August. Losses in equities were offset by successful EM currency shorts. Below is the full commentary for Hendry’s Eclectica fund.
See Hugh Hendry’s July commentary here.
The Fund was flat in August as losses from equities were offset by gains derived from shorting EM currencies.
Renewed fears of Fed tapering combined with increasing diplomatic tensions concerning Syria produced another sharp change in short term correlations from those observed in the May to July period.
This abrupt regime shift was evident in the relationship between developed market equities and EM stocks. Emerging markets lost 1.9% in August, their fifth monthly negative performance for the year.*
The S&P underperformed for the first time in many months. After starting the month on a record-high, US stocks closed down 3.1%, the steepest drop since May 2012. As a consequence, the Fund lost 19bps from relative value trades between US and EM equities and a further 20bps from directionally long US equity trades.
Digging deeper, this risk reversal was also evident in Asia where Chinese shares, having just suffered their worst setback since August 2009, produced no follow through. Instead, in a Dr Jekyll & Mr Hyde manner, they surged 5.2% on noisy economic data that just might portend a revival in the shortterm trend in economic activity.
The Fund recorded a small loss of 3bps from our short Chinese equity index trade, but made 14bps from Korean interest rate positions.
Despite the chatterings of a short-term improvement in the Chinese economy, other EM economies struggled last month and several were forced to intervene in their FX markets to contain outflows. Some chose to hike interest rates complicating their growth outlook further.
India was probably the hardest hit with the rupee falling to an all-time low versus the US dollar, its worst crisis since 1991. Foreign investors have become increasingly concerned by the trend in domestic GDP growth which has fallen from highs of 9% seen in 2010 to just 4.4% in the second quarter of 2013. Against this background, the Fund recorded gains of 75bps from short EM currency and equity trades.
Finally, Japan was not immune to the correlation tempest. Having trended so positively in the first part of the year, equities have now dropped for a fourth consecutive month, the longest losing streak since 2010. The Fund however made a modest 2bps from re-entering long positions late in the month.
Hugh Hendry, CIO