Eclectica Asset Management, the UK-based hedge fund founded by Hugh Hendry,faltered in August.
Eclectica’s flagship fund fell 7.1% over the month, dragged down by its exposure to European equities. That drop left the fund up 2.7% for the first eight months of the year, according to an investor update.
The average macro fund fell 1.29% in August and is down about 0.75% for the year, according to Hedge Fund Research.
The Scottish fund manager placed the blame on the market’s reaction to the People’s Bank of China’s unexpected devaluation of the currency.
“Up until August, Chinese stocks had been an idiosyncratic asset class waxing and waning independently of other global markets. This changed abruptly with the currency devaluation. Pandora’s Box had been opened,” Hendry wrote.
He added: “Was the Chinese economic slowdown so severe that it prompted the currency intervention? We don’t think so but other investors are less sure and the aftershocks reverberated through almost every financial markets from US Treasuries to European stocks which fell over 9% during the month and have now almost given back all the gains following the enactment of QE earlier this year.”
While the Chinese economic slowdown will have an impact on global equity prices, Hendry thinks that we may be approaching the end of a “dark period for stocks.”
More from Hendry:
“Today’s environment seems analogous to the greatly mistimed bout of bearish sentiment that enveloped markets from 1983 to mid-1984 and marked the end of an especially dark decade for bond investors. As economic data began to show a US economy recovering from the [Volcker] induced interest rate shock[,] the fixed income market, conditioned by the inflation of the 1970s, panicked and sold treasuries once more pushing the 10-year yield back up from 10% to 14%, the S&P fell 15%. Today the fear is almost the reverse: that the Chinese economy is set to suffer a growth slump and generate similar deflationary forces to those experienced in 2008 with evident and profoundly negative repercussions for global equities. But as we have noted previously with the S&P 500 having lost 80% of its value relative to Treasuries over the last 15 years (and even more so for the DAX and the Nikkei relative to their domestic bond markets) there is an argument that we are approaching the end, not the beginning of a dark period for stocks relative to bonds, and that we should be wary of reinventing the deflationary ghosts of the past decade.
“For now, it is likely that the Chinese economy will be the principal determinant of global equity prices. On the one hand we think this is a positive as it will provide cover should the European or Japanese monetary authorities wish to boost their economies further. But on the other hand, the immediate return from global equities will likely be constrained to the upside until Chinese economic data [stabilizes]…”
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