Hedge fund superstar Hugh Hendry, a partner and chief investment officer at Eclectica Asset Management, spoke last month at the London School of Economics Alternative Investing Conference.
In his first public speaking appearance this year, the contrarian portfolio manager shared his insights on the eurozone crisis, China, the hedge fund industry and life in general.
We recommend watching the five part series in full, but we’ve pulled out 10 insights from this quirky hedge funder.
Starting at age 21, Hendry did stints covering Japanese, U.K. and U.S. equities.
In 1998, he moved to London and no one would hire him because he wasn't a master of any one discipline. He was a generalist.
'No one wanted a generalist, but it was perfect training for a hedge fund manager.'
Hendry talked about the 40-year revulsion of debt and leverage following the stock market crash in 1929.
Then we started loving debt again in the 1970s.
And now we're in a period of debt revulsion again.
'The financial economy has become the economy and I think we could be subject to one of the other generational shifts whereby I should really be attending the Young Farmers Society as opposed to the London School of Economics.'
'My Confucius saying is 'wise man not invest in over capacity.''
Hendry has long been a bear on China through his 'short China' fund.
'Clearly, I'm prejudicial with regard to the model of economic expansion China is pursuing. I don't' think it's a particularly a unique strategy that it is invoking.'
A hedge fund manager's best macro trade is when he or she doesn't fear the consequences of being wrong.
'The best macro trade, the best trade of any colour, is when you don't fear the consequences of being wrong,' Hendry said.
He said it's about a question of optionality.
'So that's all about about if you set up the trade on a ex-ante basis 'how much does it cost me? how much does it pay out if I'm right?''
'I heard voices in my head that led me to take actions. As I took the actions I became very fearful of the consequences of my actions,' Hendry said.
'That's what a hedge fund manager does -- you're very fearful of the consequences of your decisions, and therefore, you give great weight to them and if you're skillful and if you're not a hostage to your errors, the future is rather promising.'
Hendry said it's best not to think you know the future.
'You have no chance of seeing the future,' he said. 'It's better to recognise that.'
'I don't know the complete picture here. I watch things like a hawk.'
He described himself as 'plasticine,' or something you can pull apart very quickly and put it back together.
If a hedge fund manager has poor timing, they should know being subjected to unlimited loss is inappropriate.
Hendry admitted at the conference that he's not the best on timing.
'My curse is I'm always early,' he said.
Here's his solution to that vice.
'You have to give great thought to how you build a portfolio. If I'm poor on timing, then being subject to a short position in equities or commodities, then being subjected to an unlimited loss is inappropriate.'
For his China short fund he said he's committed 8% of the funds assets to Japanese CDS.
'If I'm wrong, it's not going to bankrupt me,' he said adding that he also tends to favour options so all he can lose is his premium.
'I'm up against some of the brightest people on the planet. I never thought it rational to compete with them by outsmarting them.'
According to Hendry, typical hedge fund managers aim to make smaller percentages.
'Someone like Brevan Howard, the have $30 billion, and their ambition is to make small amounts like 5 or 6%.'
'The worst thing you can do is make 50% in one month,' he said.
'It's a strange, strange world.'
Hendry said that when a hedge fund manager like Crispin Odey passes away people will say, 'there goes someone who lived a life well. I think that's a fantastic compliment.
'I'm not sure you could write that on my tombstone. I'm so caught up in self-doubt...I'm just desperately insecure as to who I am.'
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