Hugh Hendry’s CF Eclectica Absolute Macro Fund management commentary for September 30, 2014. Hugh Hendry’s streak of bad luck in his Eclectica hedge fund ended in September. The Eclectica Absolute Macro Fund finished August with a gain of 2.5%, bringing the YTD return to -8.6%, according to a letter to investors reviewed by ValueWalk. However, the fund is down 6/9% in October, and negative 15% YTD according to data from the fund, which includes October numbers. In the latest letter, Hendry added a more detailed commentary then usual in the latest letter to investors, as he did last month. Before last month, the previous time Hendry added any special ‘addendum’ to a letter was in late 2013, when the one time bear turned bullish.

Hugh Hendry’s CF Eclectica Absolute Macro Fund: Manager Comment

The performance of the global macro hedge fund community has recently been boosted by the strength of the US dollar. In what seems like a clear break from both protocol and the policy of her predecessor, Yellen may have tacitly approved a competitive devaluation in the euro and Japanese yen at this year’s central banking symposium at Jackson Hole in a coordinated attempt to boost global demand.

Hugh Hendry

Whilst currency matters are the exclusive domain of the US Treasury, one might argue that the Fed appropriated this role in the QE years 2009-14. Previous deflationary shocks such as 2008 have typically created a scarcity of dollars as asset values have fallen and so jeopardized the solvency of leveraged international speculators with dollar debt. This has usually sent the currency much higher and eventually underwritten global recoveries by allowing the US household sector to perform as a consumer of last resort. If this adjustment had been allowed to happen then perhaps we would have engaged in a more exuberant global recovery marked by higher US trade deficits and new job creation and faster GDP growth in mercantilist nations such as China and the Germanic axis of Europe.

Hugh Hendry

But instead Bernanke’s Fed sat like a dead-weight on globalex US growth. QE ensured that dollars never became scarce and so the currency never surged, depriving US households of cheaper foreign sourced goods and services. And this suppression of the dollar’s external value as well as the revolution in shale oil ensured that America produced lower (not higher) trade deficits: income earned in America was less and less exported into generating demand overseas; which is to say that the US trade deficit narrowed and so deprived the rest of the world of the additional demand it might reasonably have come to expect.

Hugh Hendry

For five years the dollar index was wedded to 80 but with QE set to expire this month it now seems that this brake on the currency’s upside has been removed. This has allowed for a large movement in the short term (the dollar index has moved from 80 to 85) and yet viewed historically the recent rise seems modest. Typically such turnarounds are rare, characteristically last longer and one might conjecture that owing to the economic travails of the rest of the world could extend to at least 100.

Hugh Hendry

For us this American generosity is a godsend to European and Japanese stock markets whose exporters are very profitable at these levels. Furthermore, in the context of a global economy that still seems bereft of the private debt fuelled demand of previous years, we can’t help but wonder whether FX changes might act to re-distribute economic strength from the US to foreign shores. If so, we believe that should the dollar continue in its ascendency then it is most unlikely that the Fed will move its target rates in the next six months.

Accordingly, we believe this could prove a particularly profitable time to be long European and Japanese equities, long the US dollar and long US Treasuries where yields might be drawn closer to the lower rates that prevail elsewhere.

Hugh Hendry

Hugh Hendry’s CF Eclectica Absolute Macro Fund Attribution Report

  • The Fund posted a return of +2.5% in September with strong gains across several portfolio themes.
  • The Long DM book was a significant positive contributor to performance, recording an aggregate return of +3.8%. Japan contributed +1.4% points of this as the Fund’s long position in Nikkei futures moved higher as the yen weakened. Despite a similar plunge in the value of the euro, European stocks markets have yet to react positively to the currency’s weakness and we lost -0.4% from our European equity futures.
  • Nevertheless, despite the lacklustre performance of broader stock indices outside Japan, our equity strategies saw significant gains with international robotics companies contributing +0.8% and European pharmaceuticals adding another +0.7%.
  • Gains from DM equities were offset by losses within the China theme, where we are long equity index calls which lost -0.6% during the month.
  • In FX trading, long US dollar positions made +1.4% in aggregate, with a notable contribution from our short against the Australian dollar which was introduced during the month and made +0.7%. However, our long Indian rupee trade lost -0.2%.

Hugh Hendry