Earlier, we posted a ‘preview’ of Hugh Hendry’s March letter to shareholders. Only a few days later the letter has been released. Below is the latest commentary from the (the one time bear) who turned bullish and suffered a brutal month. Below is the latest commentary from a March letter which Hugh Hendry sent to shareholders of Eclectica Asset Management, a copy of which was obtained by ValueWalk.
March was a difficult month for the Fund, which lost -5.6%, primarily from equities, as both longs and shorts went against us.
The Fund’s core Long Developed Markets theme was the biggest drag on performance (-2.6%). Thematic equity expressions, most notably those within the internet and robotics sectors which both saw sharp declines, gave back – 1.2% and index exposure across the US and Europe cost a further -1.3% in aggregate.
Despite the more constructive overriding view on DM equities, events in Ukraine towards the beginning of the month necessitated us taking action to hedge our thematic cash equity exposure against the potential for further falls, leading us to incur losses as we were left short when markets bounced back.
The Short EM theme cost -1.6% as gains deriving from FX shorts against the Russian ruble and the Indian rupee were more than offset by losses on index shorts, especially Turkey (-0.5% on a reduced holding) and in the Fund’s “good versus bad” EM FX basket as currencies extended their recovery from the sell-off earlier in the year.
In China, losses came mainly from our Chinese “private versus State-owned enterprises” position, predicated on the likely outperformance of companies run in the interest of private shareholders over those run for the benefit of the Communist Party of China, on speculation that stimulus measures would prove more beneficial to the latter. Additional losses incurred in equity index shorts brought the total return for the China theme to -0.6%.
In Japan, thematic equity exposure to property/brokers and index positions cost a combined -0.8% as the Nikkei extended year-to-date losses. While the long-standing thesis remains intact (i.e. radical monetary policy will lead to an upside acceleration in Japanese equity markets), the recent drawdown in the index has prompted us to take steps to refine the call option strategy initiated back in November 2013. We have taken advantage of artificially suppressed long-dated volatility to construct positions on both tails, with the effect that the Fund is better equipped to ride the “swing of the pendulum” as we wait for the BoJ to reload the “bazooka”.
