“Conventional minds are a disaster at profound turning points in economic history”: as Hugh Hendry, the uber-bearish – and highly successful – founder of London-based hedge fund Eclectica Asset Management once observed.

Well, it’s always nice to see an investor put his money where his mouth is.

While there are growing rumblings about China’s overheating risks,  Hendry, whose group manages about $420m in assets, is now among the few investors to have acted decisively, taking a bold position designed to profit from an economic crash in the People’s Republic.

The move puts him in the same camp as hedge fund manager Jim Chanos, a leading China bear, and various pundits who have warned of a potential crash in China.

Hendry’s call will undoubtedly encourage the China bears just as their ranks are swelling. As Bloomberg reported on Thursday, options traders are placing a record number of bearish bets against Chinese stocks, amid growing concerns about Beijing’s moves to curb property speculation and abou the impact of Europe’s debt crisis.

To be fair, Hendry was warning about China early this year, when most China-related commentary was upbeat.

In an opinion article in the Daily Telegraph in February, Hendry suggested that money managers’ infatuation with China was misguided. Yes, he said, the country’s growth rate had been “remarkable”, seducing many with appealing investment prospects. But he warned:

The composition of China’s growth has undergone a potentially treacherous change: in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate.

As the FT reports on Friday, Hendry – well known in the industry for his bearish but highly successful calls on the global economy over the past two years – has constructed a “short credit” portfolio that stands to make gains of 250 per cent for his flagship fund in the event of a slump in China’s growth.

Eclectica is also poised to launch a standalone fund to benefit from the strategy next month, the FT added. The new fund will stand to deliver even larger gains than those for the main fund if successful, he wrote in his monthly letter to investors this week:

“The investment team and I have carefully constructed a short credit portfolio made up of over 20 single-name industrial, cyclical businesses that have the dubious distinction of suffering from gigantic financial leverage and Asian/commodity overdependence” .

Discussing his views on China earlier in the week, Hendry told Bloomberg: “There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed… China could precipitate a much greater crisis elsewhere in the world.”

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Clash of the hedgies

Hendry’s China call is particularly interesting as it pits him against star fund manager and China bull Anthony Bolton – one of the world’s best known fund managers – who raised £460m for his China Special Situations trust in April while pooh-poohing talk of a China bubble.

When Bolton returned to fund management as president of investments at Fidelity International after a two-year hiatus, he wrote in the FT: “The faster growth being seen in economies such as China’s will appear relatively attractive and I believe that a lot of money will continue to flow into the region from investors in the developed world”.

One other advantage Hendry may have in this era of hedge-fund bashing: he is not remotely fazed by the bad publicity and blame being heaped on funds for supposedly triggering such cataclysmic events as the Greek debt crisis.

Read, for example, this stirring exchange between Hendry and economist Joseph Stiglitz back in February on the subject, courtesy of Clusterstock:

Joe Stiglitz and Hugh Hendry duked it out last night on BBC’s Newsnight.

Stiglitz says that betting on a default is absurd. Hendry is betting on exactly that happening in Greece.

From Hendry’s opening line you can tell this is going to be a good fight:

“Um hello? Can I tell you about the real world?”

Then the BBC anchor asks (at 7:28): “So you want to see Greece tumble and the Euro currency tumble?”

Hendry: “Absolutely.”

This entry was posted by Gwen Robinson on Friday, May 21st, 2010 at 10:55 and is filed under Capital markets, Hedge funds, People. Tagged with eclectica, hugh hendry. Edit this entry.