Hugh Hendry, founder of Eclectica Asset Management, lays out a dangerous future for the global hedge fund industry in his latest op-ed for the Financial Times—they’re all going the way of bananas.
In the FT, Hendry suggests that the current economic climate has created a legion of hedge funds with such similar mindsets and investment ideas that if one little change in the economy causes those ideas or positions to go awry and result in losses, a majority of the hedge fund community could be screwed.
Hendry compares the possible outcome of a lack of diversity within the hedge fund industry to a blight that’s currently wiping out the common banana—
But modern mass production of single type bananas has replaced jungle diversity with commercial monocultural fields that provide more hosts to harbour the blight. The economy keeps producing stressful volatility events. Good managers keep shedding risk and monetising losses and are duly fired, leaving us with a monoculture of brazen managers who will never stop loss because they are convinced central banks will print more money.
Diversification has proven the most robust survival mechanism against failures of judgment by any one society, hedge fund manager or style. But what if we are now a single global hedge fund community afraid to take stop losses and convinced of an inflationary outcome to be all short US Treasuries and long real assets?
Although shorting Treasuries in anticipation of more inflation is a common position among that “monoculture” of hedge funds, Hendry suggests taking the contrarian position—wait til yields are lower, then short the government bond.
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