#6 – The Existentialist

Until 2017, Hugh Hendry was a maverick – an outspoken and highly controversial hedge fund manager. He closed his fund in 2017 after a period of lackustre but far from shocking performance and has become a property developer and landlord of upmarket rentals on the billionaire favourite Caribbean hideaway of St Bart’s. In this episode, he talks about his new life, how he has traded in his Bloomberg for surfing and yoga, why he is still a worrier and why he has chosen this new life as a property magnate.

SUMMARY

Former hedge fund manager Hugh Hendry is best known as the man who made 30% in 2008, when others crashed, including many so-called hedge funds. He described his cockroach mandate as being a survivor no matter what. He closed the fund in 2017 after a period of lackustre but far from shocking performance and has become a property developer and landlord of upmarket rentals on the billionaire favourite Caribbean hideaway of St Barts. But few owners of vacation lets could tell you what the 10 year bill has done in the last month, let alone give a coherent view of how it might move in 2022. Hugh may have retired but he has certainly not let go. He views the world through a different prism – he is like a photographer who only uses a fish-eye lens. We recorded on a cold London day and on St Barts, it was just as windy, as you may hear.

Hendry talks of how he nearly became an accountant (really!), the conceit and arrogance of a well-informed argument, how he had a lot of engagement with James Anderson when he was at Baillie Gifford, the conundrum as we recorded in December, 2021, of high current inflation and lower trending bond yields, how he exploited unexplored corner of the stock markets to profit from tail events and his views on Modern Monetary Theory. Hendry talks of having swapped his past life, a “life spent in the future”, for a rigorous exercise regime, surfing and yoga, but he remains a keen student of markets.

INTRODUCTION

Hendry was born in Castlemilk in Glasgow, Scotland, in 1969. Castlemilk was a scary place. It probably still is. As a 12 year old, I have strong memories of standing at the bus stop outside the swimming pool, fearful of attack. I would never have stood there without friends – a lone schoolboy in a blazer would have been an irresistible target for the local gangs. Hendry’s achievements, including being the first of his family to go to university, should therefore not be under-estimated. And it’s this background which always comes to my mind when he starts quoting French philosopher, Albert Camus.

Hendry was always seen – and sees himself – as a maverick. The hedge fund world is not solely populated by shy retiring quants so this is saying something. But he prospered as a highly original, very opinionated manager who took on complex trades that few others had even thought of, often betting on black swan type events which would afford a highly asymmetric payoff in the event of a financial disaster.

He is definitely a Marmite character whom people either love or hate, but his insights are often unusual and invariably perceptive. He puts together a framework from the world of macro by joining unrelated areas, by picking individual equities as a lever for exposure to macro changes and by assembling a series of apparently unrelated best which have a hidden correlation.

In this interview, we talked about his current life, his investing philosophy and touched on how he sees the future unfolding. I was surprised at how closely he still monitors markets in his new role.

Hendry once said to an interviewer: “To my mind, the three most important principles when it comes to investing are Albert Camus’s principles of ethics: God is dead, life is absurd and there are no rules.”

WRITTEN WORD VS VISUALS

Hendry, as you would expect, is a brilliant writer. Now he enjoys doing the occasional podcast and he also has a highly successful YouTube channel and Instagram account. He explains that he has always been visual, something which he neglected at Baillie Gifford. He didn’t thrive in their environment. But when he joined Odey Asset Management, Crispin used charts and this was a revelation. Crispin taught him to misbehave, to dare to be different and inspired in him greater creativity. Hence the richness of his YouTube videos (some filmed by famous director Dean Freeman) – watch this one with Hendry skateboarding in his Paris apartment – and his Instagram account. The social media presence is a prelude to a book about his life in finance – watch this space.

CHARTS

Hendry used charts extensively. He was always engaged in two things in conflict with one another – the fundamentals and the charts. At Baillie Gifford, without the chart element, he was rich in fundamentals and had great processing power and worked with people he really admired, but didn’t perform that well. He reflects on the “conceit and arrogance of a well-formed argument” and recalls a disastrous foray in Reader’s Digest – he kept buying all the way down until he was taken out of the trade. It went bust. The fundamentals alone are not enough. There is a danger that smart people like him can be over-confident and see things that are not there and there is an honesty in buying things that are going up and selling things that are going down.

His objective was to hold a warehouse, an inventory of rich narratives and smart ideas. Then the market would make them legitimate and he could implement the trade. An example was Weir Group which had gone sideways for 15 years and then moved, which was the signal for him to enter the trade. The stock did extremely well and Hendry can still recall the valuation metrics 15 years later –

PEOPLE

At Baillie Gifford, he clashed with James Anderson whom he acknowledges as one of the great investors of the last 30 years. Crispin Odey was very different and encouraged Hugh to “touch hot plates”. Hendry is also an admirer of Niall Ferguson, another successful Glaswegian, who has produced some excellent video as well as being a brilliant writer. Analysts are conservative. We need to teach people to be brave, to make bold claims and to get things wrong.

CHANGE OF REGIME

We have had 40 years of falling interest rates, but Hendry doesn’t believe that we are on the cusp of a regime change but rather believes that without an intervention, bond yields will trend down; the path will be lower real rates to stabilise the situation.

CHINA

Hendry thinks China’s investments in real estate and fixed assets are lunacy. We discussed the relative values of the US and China real estate pools. IN 2008, Hendry recognised that the stock of US real estate was 3x the flow of GDP; hence any diminution in value would be significant. He correctly recollects that the value of US real estate is $36tn. We discussed the value of China real estate and my Google searches suggest $55tn.

ABOUT HUGH HENDRY

Hendry was born in Glasgow, Scotland, in 1969 and graduated from Strathclyde University in 1990 with a BA in economics and finance. His father worked as a lorry driver and he was the first member of his family to go to university. His mother was a receptionist.

In 1991, Hendry joined the prestigious Edinburgh investment management firm, Baillie Gifford. He claimed that he was hired only because investors had instructed the company to recruit more working-class employees.

Hendry joined Odey Asset Management in 1999. “It was a meeting of minds,” Hendry said. “He checked my references, got the message that I was a troublemaker, and said, ‘You’re one of us, you’re one of the pirates”.

Hendry’s hedge fund was up 30% in 2008. He closed the fund in September 2017, after losing 9% that year; the main fund was down to $30m from a $1.3bn peak and total AUM was $200m.

A journalist described lunch with Hendry as akin to dining simultaneously with a hyperactive child, foul-mouthed chef Gordon Ramsay, and a free market policy wonk. He says “I have always been a heretic and argued against the consensus. I have always been angry.”

BOOK RECOMMENDATIONS

Hugh thinks reading is really important but advises reading widely, outside finance – inspiration is everywhere. He therefore recommended Gap in the Curtain by John Buchan plus several books on finance:

Edwin Lefevre’s Reminiscences of a Stock Operator about the life of Jesse Livermore

Jack Schwager’s books – there are several.

and Fisher’s Common Stocks and Uncommon Profits and Other Writings

HOW STEVE KNOWS THE GUESTS

Many years ago, I suggested to my then boss that we might copy one of Hugh’s trades, after reading one of Eclectica’s letters. I subscribe to the philosophy that there is no such thing as an original idea in the stock market. I later sent Hugh a message on Bloomberg, explaining our common Glaswegian upbringing and asked if he might spare me time for a coffee. To my surprise, he said yes. That was several years ago, but when I was thinking about the podcast schedule for 2022, I decided that we should explore the issue of regime change with some macro experts. Hugh was an obvious choice.