Sunday, March 4, 2012

Hugh Hendry Interview

An interesting interview with Hugh Hendry whereby he discusses his views and approach to investing. I like Hugh Hendry, even if I don’t agree with his macro outlook. Unlike many of his peers, Hendry is always discerning about risk and comes across as being genuine in trying to align his interests with his investors. This is very rare in the investment industry.

Hugh Hendry Hedge Fund Manager

He is a hedge fund manager in the true sense of the meaning. Hendry manages risk and tries to generate absolute returns. Whilst the whole of the industry claims to do this, the reality is they usually sacrifice this principle (if they ever had it) at the altar of trying to generate sexy returns. It’s hard to be too critical because if that’s what investors want, then that is what they will get!

Hugh Hendry Track Record

However, Hendry appeals to a more concerted risk adverse investor and, from his returns it shows.

Unfortunately, I can only see returns from CF Eclectica Absolute Macro Fund which shows 6.9% in 2010 and 11.7% in 2011. The biggest monthly drawdown was 5.2% in March 2011 and, the biggest rise was 6.8% in July 2010. Thus far, in 2012, it is down 1.6%

This interview is interesting because it raises some several points, some of which are rather cynically inevitable.

Private Equity

Hendry thinks Private Equity is unattractive because it involves tying up money in illiquid investments which could then not provide enough incentive for the manager to generate returns. In other words, the manager is not kept on his toes by the threat of investors redeeming easily.

The interviewer then goes to highlight that Hendry actually saw investors redeem money in 2008 despite the fact that Hendry made them money! Hendry put this down to the fact that they had lost money elsewhere and may have needed cash to support this.

This is consistent with my experience.

Hedge Fund Redemptions

The sad fact is that when the global economy is in a funk, wealthy people lose money across a range of their assets. Property prices go down, their businesses make losses and other financial investments lose money. So when investors see one of their assets going up (for example with Hendry) they feel obliged to cash in.

Moreover, many of them may have put money with Hendry precisely because they felt he was able to generate money in a downturn and now they prefer to be correlated with the global economy because they see upside.

The irony of it all is that if Hendry had insisted on locked-in investment, he wouldn’t have the problem of short term redemptions. He is trying to do it properly and give investors the freedom to redeem at short notice. A laudable aspect, but unfortunately it has its downside!

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