Hugh Hendry, manager of the hedge fund Eclectica Asset Management, is out with his first quarter investor letter.
ValueWalk has obtained a copy.
Like many other big names in the hedge fund world, Eclectica significantly underperformed the S&P 500 in the first quarter of 2013, returning only 3.1% versus the index’s 12.0% gains.
“There were gains from long positions in consumer staples and Japanese stocks, as well as gains from shorts in industrial commodity related stocks,” writes Hendry of the Eclectica’s Q1 performance. “In FX, the Fund profited from being long the US dollar.”
On the other hand, “Offsetting losses came primarily from long positions in commodity futures, spread across gold, oil and softs.”
Hendry is typically known for his contrarian approach to investing, and has sounded rather bearish in general in recent years. In October, he said he was long gold and short the S&P 500.
However, the contents of his new letter seem to be anything but contrarian.
Among Eclectica’s new bets, some of which were mentioned above: investing in consumer staples, U.S. equities, the U.S. dollar, and Japanese equities.
Here’s Hendry – first on U.S. equities, then on the dollar:
An unresolved but pertinent question is whether this price action might mark the start of the next asset bubble? Consider the plight of a conservative investor: concerned about the risks to the global economy and hence cyclical equities; fearful of financial repression in Treasuries; trapped (possibly unfairly) by the prejudice of the 10-year bear market in US dollars; scared that governments may have to haircut his savings account in the bank; and now terrified by the sudden price collapse in gold. It could be argued that for such an investor all roads lead to the safest, least volatile, most liquid consumer non-discretionary blue chips on Wall Street, which provide a 3% dividend income payable in dollars.
The second of our major investment themes is the likely durability of the US economy relative to the rest of the world, and the impact this may have on the US dollar. Unlike the rest of the world, America has dealt with the overhang of bad debts from the housing bubble through a vicious house price correction and resulting bust and the recapitalisation of its banking system. Wages have come down sharply relative to Asia, the shale gas boom means energy is now far cheaper as well, and the resulting lower cost base is allowing the US to reclaim market share within the global economy. As such, US real GDP is 3.3% above the pre-crisis high of Q2 2008, whereas the European economy is still languishing 3.1% below the all-time high recorded in Q1 2008.
“Perhaps more interesting was another break from recent tradition, as the US dollar proved less negatively correlated to the performance of the stock market,” Hendry continues. “It is early to draw anything firm from this, but the sight of the stock market and the dollar rising in tandem looks more like the regime which accompanied the last two dollar bull markets of 1980-85 and 1995-2001.”