Hugh Hendry just released the May market commentary from his Eclectica hedge fund (see below). We haven't checked in on Hendry since his March update when we saw he liked Annaly Capital Management (NLY), but his time around we get much more in-depth macro commentary. Hendry has compiled eleven pages worth of insight complete with charts, pictures of Chairman Mao, and even lyrics from the band Gorillaz. The main takeaway from his commentary though is that he sees hyperinflation in store as sovereign entities will need to pay off their overwhelming debts via 'worthless fiat currency.' However, for this to occur, he argues that first we need to see a large deflationary event.
Curiously enough, Nassim Taleb mentioned this sort of scenario at an investment panel where Hendry was a speaker as well. Taleb presented the idea that if you were creating a portfolio today you should allocate a tiny portion to insurance against hyperinflation. If the scenario doesn't unfold, your cheap insurance expires worthless. However, if it does occur, your investment returns an exponential amount. We just yesterday detailed how legendary fund manager Seth Klarman is worried about inflation and has bought insurance to hedge this risk.
Turning back to Hendry's recent commentary, he writes that,
it is now commonly accepted that the magnitude of the financial problems confronting the world economy are so great that in all likelihood we will be confronted by a hyperinflation allowing sovereign debts to be paid off in worthless fiat currency. Just like the Bolsheviks in 1918 and 1919, the machine-gun of the Comissariat of Finance will pour fire into the rear of the bourgeois system. We do not dispute this outcome.
So, what would that deflationary event be that serves as a catalyst? His Eclectica Fund has essentially outlined two 'game changing' scenarios: 1. China's rate of economic growth slumps and 2. The Japanese Yen suddenly appreciates and bankrupts its domestic export base.
How has he positioned his portfolio for such a scenario? Hendry has built a short credit portfolio,
made up of over twenty single-name industrial, cyclical businesses which have the dubious distinction of suffering from gigantic financial leverage and Asian/commodity overdependence. Without a doubt, some of these businesses will not survive; others will have to be radically overhauled and restructured and we will make money.
So, let the guessing game begin as to which individual names he's referring to.
Their aptly dubbed Asian bear portfolio is 3.5x short the fund's NAV and has a maximum loss of 8.5% and a maximum potential gain of 250% (if some of their names go bankrupt). In terms of other portfolio positions, the Eclectica Fund has seen strong performance from its European sovereign CDS positions as well as some of their interest rate 'swaptions' in the U.K., Australia, and New Zealand. Lastly, Hendry mentions that since the Chinese have started to import corn, this could possibly be the birth of a new trend. Regardless though, he feels corn trading at $3.60 per bushel is too cheap and has started to build a position there as well.
Hendry is by far one of the more entertaining (and contrarian) fund managers out there these days and his macro insights never fail to leave you without contemplation. While we won't spoil the fun by telling you which Chapter Hendry is profiled in, suffice it to say that he certainly makes a lasting impression in Steven Drobny's recently released book, The Invisible Hands: Hedge Funds Off the Record.
Embedded below is the May market commentary from Hugh Hendry's Eclectica Fund:
You can download a .pdf by clicking here.
So, the inflation versus deflation debate wages on. While the vast majority of fund managers we cover on the site have had an inflationary bent, we know Hendry has been in the deflationist camp for a while now. Broyhill's Affinity hedge fund recently outlined ten reasons to buy bonds and Hendry would most likely agree with some of the rationale given that he doesn't think interest rates will rise anytime soon.
We've been posting up a bunch of the latest hedge fund investor letters, so make sure you check out insight from the following managers:
- Louis Bacon's Moore Capital Management
- Ricky Sandler's Eminence Capital
- David Einhorn's Greenlight Capital
- Jay Petschek's Corsair Capital
- Kyle Bass' Hayman Advisors
And for our past coverage on Hendry, be sure to check out his thoughts on how to invest $100 million. And as always, to prepare for either outcome, head to a previous post on investment scenarios: inflation versus deflation.