Month: December 2016

Clients abandoning Hedge Funds – the case of Hugh Hendry

I am referring to this Zerohedge article (here) on Eclectica’s most recent monthly letter, where he highlights the AuM of his fund – 35 million. That’s down from 800 million at the peak, if memory serves me well.

Hugh Henry is a manager I admire a lot for his unconventional views, although I think that his arguments on China don’t make any sense whatsoever (obviously, given my positioning). Until recently he has had a great track record, uncorrelated to market moves including a significant positive performance in 2008. He is one of the few true Hedge Fund managers out there.

However, I remember some two years ago, when he turned bullish on the premise that it doesn’t make sense to fight the central banks that I felt he is succumbing to client pressure. Viewed retrospectively turning bullish two years ago was not the worst decision and with most markets mostly up, I would have expected him to do well. So I was surprised to see Hendry somehow managed to lose close to 9 percent YTD. I do not know what happened last year, but it can’t have been that good given the development in assets under management. How is that possible? Unfortunately the letter is short on this information.

In the last three and a half years that I have had a 40 percent cash position, I have had numerous discussions on whether it is appropriate to be defensive when central banks are doing everything to prevent asset markets from falling. This has never happened before, the argument goes, hence it is less dangerous to join the party. Adding to the confusion is the fact that people are generally receptive to the bearish arguments which is not the case in your typical bull market. After all, they can see that something doesn’t feel right from their daily experiences in the real economy. But the bearish argument has been there for years and the bull market has marched on and on, which a lot of people take as a proof that this time is different.

However, when you study market history, you can find a lot of similar episodes when managers had to wait for years for their view to pay off.

Most famously, Warren Buffett closed his highly successful partnership at the end of the 60ies and put his money into Treasuries to return only in 1974. And while it is true that Treasuries yielded a few percentage points back then, making it seem like an easy decision, people forget that inflation was exploding in the following years resulting in significantly negative real yields – much more negative than they are now. That’s a very painful five years of sitting and waiting while the NIFTY 50 is rising into the stratosphere. On the other hand, you do not have to be a genius stock picker to do fantastically well if you put money into a diversified stock portfolio after the 1974 crash and just hold it over the long-term. People like to philosophize about value investing and finding moats, but they forget that a lot of Warren Buffet’s performance is not due to stock picking, but because of his ability to endure psychological pain over long periods.

And then there is the great Benjamin Graham, with a quote I referred to a while back (here),

(…) Only 1 in 100 survived the 1929-1932 debacle if one was not bearish in 1925 (…)

That’s more than four years of painful waiting.

Beating the market has never been easy. I am still convinced it is not different this time.

(Disclosure: short CNH and AUD)

 

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