Hugh Hendry’s streak of bad luck in his Eclectica hedge fund continued in July. The Eclectica Absolute Macro Fund finished August with a loss of 1.0, bringing the YTD return to -10.9%, according to a letter to investors reviewed by ValueWalk. However, the fund is currently up 2.9% in September, according to data from the fund. In the August letter, Hendry adds a section noting some changes at the fund. The last time Hendry added any special ‘addendum’ to a letter was in late 2013, when the one time bear turned bullish.
Below readers can find commentary from Hugh Hendry on the month ending August.
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Hugh Hendry’s CF Eclectica: Performance Summary
Hugh Hendry’s CF Eclectica Absolute Macro Fund Fund lost -1.2% in August.
The best performing strategies were those within the Short EM theme which made +0.4% in aggregate, led by our long Mexican Peso/short Chilean Peso holding (a component of the “good versus bad” EM FX strategy) which performed well on evidence of a continued slowdown in the Chilean economy leading to interest rate cuts.
Additional gains came from our Russian FX short, which we have traded tactically throughout the course of the year. Having begun 2014 short the ruble as a result of our concerns regarding the health of the Russian economy, the situation in eastern Ukraine has provided an additional catalyst.
Hugh Hendry’s CF Eclectica: Long position in the Hang Seng China Enterprises Index
Within the China theme (which gave back -0.2% during the month), we initiated a tactical long position in the Hang Seng China Enterprises Index via call options. This reflects our view that the Chinese Government will underwrite the domestic banking system. Furthermore, the authorities have embarked on a coordinated push to encourage investment in Chinese stocks, both through increasing domestic interest and by further opening the market to international investors throughthe Hong Kong – Shanghai stock connect. With Chinese stock valuations and sentiment at rock bottom the potential is there for a strong outperformance.
Gains from holdings in European pharma and global internet companies were insufficient to offset losses incurred during the early part of the month on European index positioning and peripheral equities as the Long DM component returned – 1.1% in aggregate.
In Japan, Nikkei futures were the main drag on performance as, in contrast with equity markets elsewhere, the index fell – 1.3% after three consecutive months of gains. The total return for the theme was -0.6%.
Elsewhere, our holding in the US 30 year Treasury generated a return of +0.6% as geopolitical events ensured that demand for “safe” assets held up and speculation regarding further ECB intervention made the yield on US bonds look relatively appealing.
Hugh Hendry’s CF Eclectica: Manager Commentary
We should have done better in August. We shuffled our equity cards rather than buying more into the weakness. This has prompted us to rethink our book.
As we have said previously, the global macro environment continues to be defined by a historically tepid recovery from the depths of the 2008 contraction. And this demand-light, low inflation recovery has been met by a wholesale purging of those public officials charged with running the largest central banks.
The presence of Draghi and not Weber, Trichet or Duisenberg (or in Japan Shirakawa, or an American hawk such as John Taylor) helps to explain why the German, Japanese and American stock markets all rose 30% in dollar terms last year. It also helps explains why, with the European recovery wilting and medium term inflation expectations making new lows, the ECB found the wherewithal to ease further. With European stock prices down over 10% during the summer, the central bank eased policy considerably and stock prices are rising once more. Clearly this marks a monumental shift in Europe: the once austere German based central bank has jettisoned its tradition and is explicitly targeting higher prices.
Hugh Hendry’s CF Eclectica: Japanese recovery shaken by consumption tax hike
The same could be said about Japan. Japan’s recovery has been shaken by the consumption tax hike and any further economic weakness will most likely be met by further monetary accommodation. Again, price weakness has presented an opportunity to buy. Japan’s stock market had fallen 15% earlier this year, today it is not far from challenging its previous high. When central banks are actively pursuing a goal of higher prices the most rational course is to tenaciously remain invested in equities.
Following this latest announcement of policy easing in Europe we have been actively accumulating more equities. In mid-September, we are currently long 107% equities, with 25% invested in the Nikkei, a further 10% invested in European stock indices and 8% equivalent exposure from short dated options on China’s Hang Seng China Enterprises Index, not to mention a further 63% invested in an equity book that spans Europe’s largest pharmaceutical franchises, Japan’s robotic machinery businesses and a global internet basket.
That is not all. We also have a further 6bps DV01 exposure to receiving rates, predominantly long dated Treasuries. The reasoning is similar to our equity book. Central banks seem capable of expanding their price setting franchise to establish nominal rates low enough to support the tepid global recovery.