October 2002: Baptism of Fire

I cry, You Cry. New babies, catching fallen angels, too early for rate cuts.

Baptism of fire: launching a global macro hedge fund at the bottom of the bear market.

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Transcript

Hey guys, Hugh Hendry. As I think most of you know, I was responsible for a global macro hedge fund. I ran it out of London between the years 2002 and 2017. So 15 years, 15 years eclectic by name, eclectic by nature, uncorrelated returns. Was it the best macro hedge fund ever? No. Was it entertaining? Was it uncorrelated? Did it correlate with anything in the world? It didn't. It was unique. Regardless, and I'm hoping that you will want to hear my story. This is the story of someone growing up with investors with responsibility to write a letter each month, a letter of culpability typically, I'm really sorry I had this great idea. Typically it was... we were just too early. But it was, it's like, my diaries and therefore is a master class and I hope if you can be persuaded to stay tuned as we go through these month, monthly, so I'm going to give it, we're going to shoot about 10 minutes. I fear is going to be deadly dull, but there were just so many things happening  in my life. You know, I you see the curse was too many interesting things, too many great anecdotes for going to data and showing people and so hopefully we can bring out those anecdotes because this was such an amazing time. Crispin Odey and I was working within the confines of the partnership, I was a partner at Odey Asset Management. And Crispin had for many years been reestablishing his immense credibility after the debacle he suffers way back in 1994 when he got trapped in a position in British girls, I don't want to get stuck on that. But he could see he was very much on the cusp of, of being forgiven, if you will, and assets were beginning to grow again. But we were managing a very, very small amount of money compared to where the world accords genius today. And we had very, very small tight, very, very eccentric stuff. And Crispin was loath to let me in, he could see something of his character, perhaps, something of his madness past more appropriately in the management of a hedge fund. Remember, he said: no one does. There's no handbook. It's like driving a sports car and, like, cuz you want to drive really, really fast and so he's really worried that to give me the keys to his Ferrari and the damage that I could do, not only to myself but of course to his reputation, that he had worked so fastidiously on trying to repair so that was the kind of backdrop. Why don't I can plunge straight in because for the first month, and I'd ask you again to remember that most hedge funds fail in the first year. That's the thing that's uppermost in your mind. Most hedge funds fail in the first year, is kind of like a restaurant, is why a good restaurant, a restaurant that endures is a restaurant that typically makes a lot of money, like hedge fund broadly today, and in the month of October 2002 I lost 4.8, 4.8, I'm going to say it again, I lost 4.8% when the markets were up, eight, what would we have? At least the benchmark we used was the food see the FTSE all share, which is an equity index. Remember we're going to be like this: it was like a private client vehicle. Back in the day. No institutional investors, family offices were the investors. And it had been a great month for equities. And there is scant detail in this report. I have copied the report and you can read the report idea on leisure but the media doesn't say anything in terms of marks out of 10, very much one out of 10, would you believe I was almost 102% gross long? My shorts, but what you think, 40% short, my shorts were less than 1%. So I was 101% net long. The market was up 8% and Henry was though the best part of 5% and there's no mention to whatever it was that was eating away at me. The only hint is in the opening sentence when I say the European Central Bank, got it wrong. How often have you heard me say that? It began in my first letter. The ECB had last cut interest rates almost a year before I had launched this fund, but it had taken rates down from where the 3.75% and it cut rates by 1.5%. Or actually got quite aggressive to the tail end of 2001 with almost like monthly cuts, but from November 01 nothing, absolutely nothing. Whereas the Fed have been very proactive. And so I imagine when I see those returns, I have to imagine because it's not in this report, but I imagine and forgive me as I'm moving around, let me get closer. I imagine that I had a very large interest rate futures position, which was with little life left, which was there anticipating that we would get rate cut, no rate cut, no P&L, and probably we were playing something with time and so we probably lost money for the time lost on that adventure. And of course, I really have ironies. I think we were, it was December before we got the next markets, equity markets we're clearly anticipating. And then what I want to do is that a nice reports we always keep and we attempt to give a stock insight or a trade insight to try and explain the nature of the thinking to try and be transparent. And when I see the stock or the stock inside square, these yellow pages, these classified directory books and when I look at the top long holdings, we were pretty much I guess let's call it the Ben Graham buffing on the cigars. And the last embers of the great TMT Smash. We were buying stocks which had fallen 80 or 90%, 80 or 90%. And the one we really have reference to in the report was in Nero. And I've, I've checked before doing this in Nero is still listed today. That's not safe much. And you set a really, really tough time. So back then, it had been a darling, back then it was going to use this cash flow and it was going to be an internet platform. It didn't work out. It is a waste of a huge amount of money on adventure in Germany, but it closed it and you still Yellow Pages for like a utility cash generating thing. You really still didn't have Google. And we all had these big thick books. So if you're old, like I talked about this stuff and with the cash flow so you take the free cash flow so, you know you're taking care of any movements in working capital, you're looking at the kind of capex you're trying to normalize capex depreciation and you're figuring, trying to find the cash flow that you could, you could, it would be attributed to you as the equity investor, having paid out the stakeholders, tax to the government interest payments to the banks to the debt holders, like maintaining the nature of the business in tax or investing in the business, the creditors of the business, that's why we look at working capital, and after expressing wherever that cash flow figure was, these are the market capitalization. And back then, we were attracted by this 10% ratio. And we hired an investment. Knowing me we would have had a very large investment I was like, I always wanted to see, I was like the center. I wanted to have an idea and I wanted to have that idea expressed into like 100 iterations. Because I was constantly, the book, we were constantly, you know, during a day you had to write, getting excited and getting sentimental but my trailer sub psyche with a big boo, like Charles Dickens story, very Victorian, and you handled all of the trades, I want to say we did about 20 pages of trades every day. If you remember that be not I think Danny Boyle made a movie about it. About the climber in some US state and he gets his arm trapped in a boulder, and he's on his own, and he can't free the arm and he's gonna die. Unless he gets his arm out and Bob so Louis get his arms by cutting his arm off. And understandably, having only two arms and two legs, two arms, he procrastinates like I really want to cut this off? Sure I'm going to die if I don't cut this off. But I'm gonna die if I don't cut it off, you know, back and forward. And so for me, I didn't want to have just two positions, I was 100 positions and I was selling them every day and buying them back every day just as I kind of try to gauge sentiment I try to gauge where I was in terms of my understanding. Remember, I was always kind of like, I was looking at the charts. The charts were like sheet music, and they were conjuring up images. And then I would have this really small pool of talented individuals who then triangle and corroborate and legitimize what I was feeling coming through in these chart expressions. And hence we came back with the cash flow figures. However, to wind it up, a needle was a dying business. I am, I'd have been better placed elsewhere. Was very much a distraction from my interest rates, which were the big story, they will go on and we'll discuss that. And I started the fund pretty much at the laws of European equities. But it took us a bit like gold, and we're going to talk about gold in the next series. But golden equities kind of were very, very volatile and kind of went sideways for the next three or four months. And it was a challenging baptism of fire. But between the end of 2002 and the middle of 2005, European stocks doubled, kind of went back touch the high and then the Euro, I think matched up but in terms of like, okay, it's the market doubled. That's good. We find a stock and it doubled. That's not great. So per business that we bought, should have done better. And did I mention that my son was born that month, my son was born with silent reflux. So he was a baby who cried every day of that month. And my wife who cared for him, cried every day because he was crying. And with me being down 4.8% in the market being up 8% believe me, I was crying. So, no more tears. If you're interested, I'm going to do this exercise again. And we're going to talk about November 2002. Thank you very much, everyone for listening.