By Hugh Leask
Contrarian hedge fund managers Hugh Hendry and Barry Norris set out their key investment ideas and views on looming macroeconomic challenges at an event in London recently.
Former Eclectica Asset Management founder Hendry said his largest position currently is Bitcoin, while Argonaut Capital founder Norris remains short U.S. regional banks.
The event, a live recording of Zeus Capital’s podcast ‘A Different Perspective’, saw ‘Acid Capitalist’ Hendry and ‘Alpha Alchemist’ Norris debate the evolving macroeconomic backdrop, the impact of ESG trends on the fund management industry, and their key investment calls.
Asked about Stanley Druckenmiller’s concept of the ‘fat pitch,’ Hendry outlined his quadratic perspective to investing, which comprises equities, government bonds, alternatives, and cash.
“You should be thinking at all times in that quadratic manner,” Hendry told the audience. “I believe in mean reversion in these four compass points of macro. I do not believe in mean reversion in individual stocks – there is too much idiosyncratic noise.”
He explained: “My biggest risk exposure today is Bitcoin. When I look at the alternatives space, it’s $100 trillion. If we assume those 21 million Bitcoins that are mined are valued today, that market is half a trillion dollars. Gold is $13 trillion. If Bitcoin triples that’s $1.5 trillion. When I think of those compass points, the one asset class that has the potential to be 3x or 4x is Bitcoin. It’s my largest exposure simply because the volatility is still two to three times greater than any other asset class.”
Meanwhile, Norris – who manages the equity long/short Argonaut Absolute Return strategy, which combines contrarian top-down macro perspectives with a bottom-up ‘earnings surprise’ approach to stock selection – expects the next 10 years to look similar to the 1970s, in terms of a stop-go process, with nominal growth instead of real GDP growth.
More bank failures?
Norris, who profited from a sizable short bet in Silicon Valley Bank earlier this year, said he remains short U.S. regional banks due to interest rate margin pressure. He also believes the UK domestic economy is in a “lose-lose situation,” and is more vulnerable to higher rates. “We are also starting to see real economy profit warnings.”
Hendry – a well-known contrarian macro investor who launched Eclectica Asset Management in 2005, gaining 50% in a single month in October 2008 before closing in 2017 – suggested the existing banking model is dead. “There is a hell of a lot more bank failures to come,” he observed.
Norris said the “only rational explanation” for the prevailing elevated inflation is that during COVID-19 there was an “illogical response” to the crisis – namely that global central bank balance sheets increased from $20 trillion to $32 trillion in two years as a result of QE, a development he described as “a new chapter in popular delusion.”
“I hadn’t realized how this affected the real economy until I started analyzing the US banking sector about six months ago,” Norris said, adding that he believes an economic hard-landing is now inevitable. “In two years, customer deposits went up by $5 trillion. The Federal Reserve balance sheet went from $4 trillion to $9 trillion; we also had $5 trillion of fiscal stimulus.”
ESG’s potential impact
The wide-ranging discussion also touched on the ways in which environmental, social and governance trends have upended the investment management industry.
Dressed in a top-hat, wifebeater vest and suspenders, Hendry expressed “profound consternation” at high-profile hedge fund activist Sir Chris Hohn’s support for Extinction Rebellion, the UK-based direct action environmental campaign movement, while using a private jet. Hohn, whose activist firm TCI Fund Management has a strong focus on ESG and responsible investing, has personally donated £50,000 to XR, whose civil disobedience tactics have drawn criticism in the UK recently.
However, Hendry – who also managed money at Crispin Odey’s Odey Asset Management between 1999 and 2002 and, earlier, at Credit Suisse Asset Management and Baillie Gifford – acknowledged there is a climate change challenge. “It is within our resolve to find a solution”, he said pointing to the concept of ‘polluters’ permits’ in Europe.
Norris was more critical, suggesting that ESG is “a political construct”, and questioning who writes ESG rules and what authority they have.
“It’s profoundly undemocratic – nobody ever asked me what I thought the rules should be,” Norris remarked on the growth of ESG. “Ultimately, I think it ends up with huge capital misallocation towards carbon-free hotdogs, flying taxis and solar-powered tanks, none of which we need, but which somebody who wrote ESG rules thinks we should allocate capital towards.”
This article, “Hedge fund contrarians Hugh Hendry and Barry Norris face off in debate,” was originally published on June 27, 2023 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.
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