Just buy and hold forever baby. The central banks will prop up asset prices forever. There may be a singularity down the road but it is nowhere in sight.(Via MoneyWeek)
Merryn: OK. Well, let’s talk about your view of the world now. Last year there was the infamous letter, the great bullish letter, as something you’d be interested in and your clients said, “No, not really.” Can we make mention of it now? Is there something you can say to your clients now that would re-interest them in this concept of the great bull?
Hugh: Well, let’s have a go. Because there are two things unfolding. Hedge funds and within the broad tranche of hedge funds, macro hedge funds are struggling to make money, and there is a dissatisfaction with that. I’m not the only manager to have suffered withdrawals.
Merryn: Why do you think that this sector as whole is failing to make money? What’s going on there?
Hugh: Well, I can’t be a spokesman for other and far better managers.
Merryn: But I’m sure you can allow yourself to comment on them.
Hugh: But I can reflect on my own difficulties, if you will. What I’ve found is that macro is distinguished, I believe, by superior risk control. It’s almost analogous to a disaster insurance programme. In 2008, all the good macro managers, they made you money. That’s what you pay them for. The world became profoundly unsettling and you cashed in your insurance policy.
Today, I question the relevancy of that disaster insurance. In a world where the central banks seem to have your back, seem to be underwriting risks and global asset prices, do you require that intense scrutiny of risk?
So when I look at my fund, my fund’s not dissimilar to others. We go out of our way to avoid traumatic periods of losing money. For us, typically, that would be defined as losing 5% or more in one month. Such, I think, is our capability that we have 12 years, in running this fund. So 144 monthly observations. Out of that we have had the indignity of suffering nine such months. Not that many when you consider the tremendous amount of either bull market or bear markets that have gone on.
But it forces you, that disaster scheme if you will, or prevention scheme, it forces you to reduce risk. Which is to say to sell the things you like when they go down in price. Notably this year, I had constructed this argument that I wanted to be bullish, yes, and yet, with risk control, I found myself a seller at lower and lower prices. Lo and behold, it became impossible to fulfil my mandate and to make money. I think that is a problem that I shared with many others.
Now I have, again I’m introvert, and I look and I examine my own behaviour. I have concluded that my risk tolerances were too taut and it was creating too much of my own intervention, in the portfolio, and it was damaging to the client’s performance. So I’ve pulled back or I’ve widened the tolerance of the portfolio.
Merryn: So your basic point here is that if the central banks have your back, there’s no need to have the same kind of risk controls that you used to have.
Hugh: There is less need. Less need. I tell you, I was at a conference with some of the great and the good global macro managers in September in New York and I asked them all the question, “If the S&P is down 12% what do you do? Are you selling more or are you buying?” Guess what? They’re all buying. So the central banks have created a behavioural tic which is becoming self-reinforcing and I believe we saw another manifestation of that behaviour in October.
So when I look at the year, I started the year hugely bullish on Japan. Hugely bullish, let me say, not qualitatively. I’m not an advocate of the three arrows and the resuscitation to the great heights of whatever Japan represented in the 1980s.
I am saying that I can see persistent failure to achieve such honourable ambitions, which leaves no recourse but to intervene again and again and again. Therefore I see the Yen being a weak currency.
The other side of that, the stock market, being higher and higher and higher. But I think four months of the year the Japanese market had fallen 16% from its high, and I had to swallow my pride and I had to reduce position.
I had to sell at lower prices, and yet, such is the foreboding presence or shadow cast by the Bank of Japan, that not even if we mentioned the recent intervention, without that intervention the Nikkei had gone back to its previous highs. So I was wrong in selling.
Again, over the summer the European stock markets had a similar decline, even greater if you look at the banks’ index, I think it was down over 20% and what happened? The ECB responded and took its rates negative and it committed to re-engaging, re-utilising its balance sheet to acquire European risk assets. Prices rapidly rallied from the middle of August into September. Why did I sell?
So thankfully, you only make those mistakes a few times, if you’re wise. So when we came into October, I got it. I got it. That, as a discipline, meant we stayed invested in the month of October and then we were able to buy more equity risk towards the middle of the month. Which is to say, we made money in October. We made money in September and we made money in August.
So if you will, it’s not just the narrative, it’s the risk engagement and giving trade expressions the room to breathe, such that they may prosper.
Merryn: So the simple message here, is in a market like this never sell anything and you’ll be fine.
Hugh: You can say that, but I cannot.
Merryn: OK. Well, let’s talk about your view of the world now. Last year there was the infamous letter, the great bullish letter, as something you’d be interested in and your clients said, “No, not really.” Can we make mention of it now? Is there something you can say to your clients now that would re-interest them in this concept of the great bull?
Hugh: Well, let’s have a go. Because there are two things unfolding. Hedge funds and within the broad tranche of hedge funds, macro hedge funds are struggling to make money, and there is a dissatisfaction with that. I’m not the only manager to have suffered withdrawals.
Merryn: Why do you think that this sector as whole is failing to make money? What’s going on there?
Hugh: Well, I can’t be a spokesman for other and far better managers.
Merryn: But I’m sure you can allow yourself to comment on them.
Hugh: But I can reflect on my own difficulties, if you will. What I’ve found is that macro is distinguished, I believe, by superior risk control. It’s almost analogous to a disaster insurance programme. In 2008, all the good macro managers, they made you money. That’s what you pay them for. The world became profoundly unsettling and you cashed in your insurance policy.
Today, I question the relevancy of that disaster insurance. In a world where the central banks seem to have your back, seem to be underwriting risks and global asset prices, do you require that intense scrutiny of risk?
So when I look at my fund, my fund’s not dissimilar to others. We go out of our way to avoid traumatic periods of losing money. For us, typically, that would be defined as losing 5% or more in one month. Such, I think, is our capability that we have 12 years, in running this fund. So 144 monthly observations. Out of that we have had the indignity of suffering nine such months. Not that many when you consider the tremendous amount of either bull market or bear markets that have gone on.
But it forces you, that disaster scheme if you will, or prevention scheme, it forces you to reduce risk. Which is to say to sell the things you like when they go down in price. Notably this year, I had constructed this argument that I wanted to be bullish, yes, and yet, with risk control, I found myself a seller at lower and lower prices. Lo and behold, it became impossible to fulfil my mandate and to make money. I think that is a problem that I shared with many others.
Now I have, again I’m introvert, and I look and I examine my own behaviour. I have concluded that my risk tolerances were too taut and it was creating too much of my own intervention, in the portfolio, and it was damaging to the client’s performance. So I’ve pulled back or I’ve widened the tolerance of the portfolio.
Merryn: So your basic point here is that if the central banks have your back, there’s no need to have the same kind of risk controls that you used to have.
Hugh: There is less need. Less need. I tell you, I was at a conference with some of the great and the good global macro managers in September in New York and I asked them all the question, “If the S&P is down 12% what do you do? Are you selling more or are you buying?” Guess what? They’re all buying. So the central banks have created a behavioural tic which is becoming self-reinforcing and I believe we saw another manifestation of that behaviour in October.
So when I look at the year, I started the year hugely bullish on Japan. Hugely bullish, let me say, not qualitatively. I’m not an advocate of the three arrows and the resuscitation to the great heights of whatever Japan represented in the 1980s.
I am saying that I can see persistent failure to achieve such honourable ambitions, which leaves no recourse but to intervene again and again and again. Therefore I see the Yen being a weak currency.
The other side of that, the stock market, being higher and higher and higher. But I think four months of the year the Japanese market had fallen 16% from its high, and I had to swallow my pride and I had to reduce position.
I had to sell at lower prices, and yet, such is the foreboding presence or shadow cast by the Bank of Japan, that not even if we mentioned the recent intervention, without that intervention the Nikkei had gone back to its previous highs. So I was wrong in selling.
Again, over the summer the European stock markets had a similar decline, even greater if you look at the banks’ index, I think it was down over 20% and what happened? The ECB responded and took its rates negative and it committed to re-engaging, re-utilising its balance sheet to acquire European risk assets. Prices rapidly rallied from the middle of August into September. Why did I sell?
So thankfully, you only make those mistakes a few times, if you’re wise. So when we came into October, I got it. I got it. That, as a discipline, meant we stayed invested in the month of October and then we were able to buy more equity risk towards the middle of the month. Which is to say, we made money in October. We made money in September and we made money in August.
So if you will, it’s not just the narrative, it’s the risk engagement and giving trade expressions the room to breathe, such that they may prosper.
Merryn: So the simple message here, is in a market like this never sell anything and you’ll be fine.
Hugh: You can say that, but I cannot.
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