Paulson vs. Hendry
- 30 April 2012
Hugh Hendry, manager of the CF Eclectica Absolute Macro Fund believes that China is the weak spot of the global economy , adding that he is "long the debt saddled west and short the vastly over vaunted and over owned BRICs": "There is a near consensus that China will supplant America this decade. We do not believe this." He says he is "more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down."
In particular, Hendry is positive on the US: "We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point."
He believes that the global economy is ‘grotesquely distorted' by the presence of fixed exchange rates as it was in the 1920s and 1930s by the gold standard. This applies in two areas: the eurozone and the dollar/renminbi peg. Hendry, always a natural contrarian, argues that while the distortions created by the Euro are well-known and understood, the distortions created by the dollar/renminbi peg are less well-recognised. This, in essence, has led to the current positioning of his funds.
This stands in direct contrast to most hedge fund managers. Today's FT reports that hedge funds have resumed their significant bet against the Eurozone economies. Increasingly this is not just against the peripheral countries, but also the ‘core' – including France, Germany and the Netherlands, representing a ‘new, deeper level of bearishness on the single currency area's prospects'.
"A clutch of hedge fund managers, supposedly among the savviest investors around, are directly wagering that Europe's problems have become so entrenched that they will lead to a much more serious crisis in the coming months than the eurozone has experienced."
One of the key investors to have raised his head above the parapet is John Paulson, the billionaire hedge fund manager, who has given investors in his portfolios a rocky, if ultimately profitable ride.
"Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely." As a result Paulson has gone short German government bonds, believing that the problems from the Spanish government will spill over.
So who to back? Paulson famously spotted the collapse of the US housing market, which has given him some long-term credibility with investors. On the other hand, Zerohedge calls Hendry one of the ‘true (if completely unsung) visionary investors of our time'.
Although Paulson's long term return has been good, he had a dismal 2011. The Advantage Plus Flagship fund had the worst year in its 17-year history last year, falling 44% in the twelve months to October. Paulson admitted he was ‘over-optimistic' about the outcome of the Euro crisis and his net equity exposure was too great. His current positioning may be a desire not to make the same mistake again. He has also suffered from his conviction that inflation will ultimately increase the demand for gold as an alternative to paper currencies.
Hendry's CF Eclectica Absolute Macro Fund has provided a smoother, if less exciting, ride. The fund launched in December 2009 at 100 and is now trading at 109. It has been as high as 113, but has had a weak run of late and is down 2.8% since the start of the year. He remains 86.4% invested in long-only equity, but has tended to make investors money in falling markets.
Investors deciding on East versus West may be reassured by the thought that they are aligning themselves with the finest minds in the financial world, but the choice is by no means straightforward.
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