While we were busy with the Robin Hood Investors Conference, a longtime bear fell to ashes, so to speak. At the Harrington Cooper’s 2013 conference, Hugh Hendry, founder of Eclectica Asset Management, said he was done with being short when the trends were just not in his favor at all.
Making the trend your friend
According to Dan Jones from Investmentweek, Hugh Hendry has finally given up on being the shortseller when markets everywhere are trying to reach the record of record highs. In his presentation at the conference, Hugh Hendry said that the price wars between China and the U.S. are turning into an endless feedback loop. At one end, the U.S pumps up QE to increase dollar denominated trade, in retaliation, China fuels investment which forces the U.S. to adopt a dovish fiscal policy again, and the cycle goes on. Hugh Hendry said that at times like this, following the trend is really all you can do, adding,
“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.”
Hugh Hendry Eclectica fund underperforms
Hugh Hendry’s Eclectica Fund has been suffering this year, Eclectica Absolute Macro Fund is down 2.6% YTD, according to the monthly returns listed on the website. Eclectica has been losing on its short bets just like every other hedge fund which has been betting against the market. Like we noted in our September update, the macro fund has boosted its risk exposure significantly in equities over the last couple of months, signalling a change in investment philosophy.
While speaking on Bloomberg TV last week, David Tepper, probably the most bullish investor around, said that he feels sorry for all his friends in the industry who manage long/short funds. He said this was time to stay long and long-only, as shorts are severely underperforming.
Other short-bias hedge funds have had an equally tough year, Waterstone Market Neutral Fund saw its assets drop from $1.3 billion to roughly $960 million as returns slipped to -15% YTD through Nov 1. The main issue with short bets has been that traders have crowded into stocks with high short interest, thus driving their prices even higher. David Einhorn summed up the process really well in his last investor letter,
“When “high short interest” becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can’t help but feel a sense of déjà vu. We never expected to find ourselves in an environment like this again, given the savings that were lost when the internet bubble popped.”
Hugh Hendry bullish on European equities
Hugh Hendry was already bullish on U.S. and Japanese equities; he has now added the restructured European companies to the mix as well. Hugh Hendry noted that he was not scared of a market crash but he could not continue to stay short when there was no favorable trade involved.
Given that investors like Stan Druckenmiller have invested in stocks like Herbalife Ltd. (NYSE:HLF) solely for the purpose of a trade, it does not come as a surprise that being the shortseller and perma-bear is a hard thing to sell. At the end of the day, everybody has to make money and win the trade.
So long Hendry!