Hugh Hendry, Fund Returns And China’s Bubble

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Hugh Hendry, Fund Returns And China's Bubble

Hugh Hendry, the the famous China-bear, has been out of the media spotlight in recent times. However we’ve exclusively received his report on the performance of one of his major funds including his opinion on the future of Europe, China and the United States. Here’s our run down on the performance of the fund and his outlook on the global economy.

His fund, the Eclectica Absolute Macro Fund, has been up and running since December 2009. It can invest in the Global Equities, Commodities, Global Fixed Income, Currencies and Global Credit. The fund currently has £95.8 million Assets Under Management.

The Fund returned 1.7% in April on its Class A £ shares. So far in May the same shares have returned 0.7%. Since inception in December 2009, the fund has returned 12.1%.

 Long exposure to non-discretionary consumer businesses returned 28bps and short index positions returned a further 135bps. These gains were partially offset by losses from a long exposure to agricultural shares. Total equity returns were 1.5%.

On China Hendry is, as usual, pessimistic. His letter outlines several problems coming to a head in the country stemming from a low return rate on deposits that has led directly to mass investment in the real estate market. that investment has caused a real estate bubble in the country according to Hendry. The crisis he sees coming will devalue the renminbi as the authorities try to deal with the crisis.

There are implications of Weimar style hyperinflation coming in the report. It is not a solid prediction by Hendry but the inference is strong in comparison. On top of China’s troubles Hendry wants to short Japan based on the country’s lackluster performance in recent years and it exposure to China’s coming storm.

Hendry outlines three ingredients that make a good macro fund manager. The first is successful but contentious macro risk posturing, the second is the ability to pick assets with a high probability of payout and maintain an asymmetric loss profile, the third is an ability to respond quickly to changing performance in order to mitigate losses.

Because of his predictions on China and the crisis in Europe Hendry is long on the US Dollar and the British pound assuming there will be a return to value in the currencies as stores of value in the darker times to come. By the same logic he is short on the Australian Dollar as the appreciation in the currency, based on China’s resource buys, is set to fall if China fails. South Korea according to the fund’s holdings will also be vulnerable to the changes and he is shorting that country’s currency the won.

Hendry, in rhetoric at least, is betting big on China. His outlook on the global economy is a terrifying one but it is also very convincing. There is something perverse about betting on a second crisis in the worlds economy as it flounders in recovery but that’s what Hendry’s doing. The data, at least as he presents it, is in his favor and the compelling and simple idea, that China will crash, be left with little to instrument recovery and bring the rest of the world with it, is one that could capture public attention as China struggles with its growth.


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