Hugh Hendry suggests he could have found a 'unique' trade as Europe approaches a ’dramatic fulcrum’ point in Europe following the Brexit vote.
‘Since the Brexit referendum we have been developing our thoughts about what the Leave vote might mean, not just for the UK, but for the European project as a whole,’ Hendry (pictured) said in his latest monthly update for his Eclectica fund.
‘[And] our main conclusion is that by doing the unthinkable and actually voting to leave, Brexit substantially increases the likelihood that other members of the European Union will also seek to break away.
‘Remember, just two years after the UK similarly rejected the gold standard back in 1931 there were just 12 remaining members versus the 45 that had previously been committed.’
Hendry believes the robust performance of the UK economy since the Brexit vote will do little to dissuade other economises from following suit and voting with their feet.
He reckons the flurry of upcoming elections and referendum provide the catalyst for the turning point in Europe.
‘First of all we have the still too close to call US presidential election where a Trump victory would be hailed as a triumph for the same arguments that led to Brexit,' Hendry said.
‘Closer to home there is the Italian referendum on constitutional reform set for the first week in December, where it looks increasingly likely the government will be defeated.
‘Such a defeat would likely force prime minister Renzi to step down, potentially allowing populist parties to step into the resulting political vacuum and push a more nationalist agenda.’
Next year is also a big one for elections, with France and Germany due to go to the polls, while Spain has yet to form a government despite two national elections.
‘The system simply isn’t working…we could go on and on but you know most of this already. I apologise; sometimes macro managers can be a little too self-absorbed by the intricacies of the chess like competition we find ourselves engaged in with other risk takers and policy-makers,’ Hendry said.
‘So instead let’s ask the “where are all the customers’ yachts” question, which is to say that, knowing all of this detail, why would you put your money in a macro hedge fund like ours today?'
Hendry believes the scene is set for ‘outsized’ returns for a ‘unique’ trade in the fund.
His gloomy prognosis on the economy has led him to ‘seek low cost and high conviction convex trades that pay off should very bad events occur’.
He added: ‘[With] central banking actions having boosted all risk asset prices to (some would say) dangerously high levels, you might need something in your portfolio executed by an experienced macro fund with a track record in putting together bearish trades which are constructed in a fashion which provides asymmetric convexity rather than delta one noise, and which doesn’t cost the earth in negative carry or option premium decay.’
Hendry admits it is challenging to find these convex trades which not only carry well, but also work under scenarios which are identifiable and plausible.
But he suggests his portfolio may way have found the very trade, although it remains a bit of a mystery as he does not give too much detail on the nature of it.
‘What if we were to tell you we have a cross-asset trade that we believe underwrites what we perceive to be the most plausible downside European risk scenarios, carries positively with no decay and can make almost 5x the worst case loss scenarios?
‘A trade that could capture the real and present danger of more members following the British decision to seek an exit from the political union as mass fears concerning immigration, unemployment and inequality seem set to define national elections in Europe and elsewhere.’
Hendry will be hoping this unique trade can help revive his flagship strategy.
The Eclectica fund, which controlled $1.5 billion at its peak, is best known for returning 50% in October 2008, the month after Lehmans collapsed.
However, his reluctance to increase risk has hampered performance in the years since, with the fund having lost around $1 billion in assets. Year to date the fund has suffered an 8.9% decline in performance.
Meanwhile, an Alternative Ucits version of the strategy has returned 0.2% over the last five years versus a peer group average of 14.05%.