Hendry and Treue: The Immortal Trades

Published on
September 25th, 2020
Duration
62 minutes

Ben Inker — Jeremy Grantham’s Heir Apparent on the Future of Asset Allocation


Hendry and Treue: The Immortal Trades

The Interview ·
Featuring Hugh Hendry and Bob Treue

Published on: September 25th, 2020 • Duration: 62 minutes

Hugh Hendry, founder and former CIO of Eclectica Asset Management, is joined by Bob Treue, founder of Barnegat Fund Management, to put on a clinic of idea generation. Due to its consistently high returns, Treue’s fund is ranked by Bloomberg as the world's #1 fixed-income arbitrage fund. Treue shares with Hendry his process for consistent success and recounts some several of his grand-slam trades -- from arbitraging the spread between U.S. Treasurys and their inflation-protected counterparts to relative value plays on the yield curve for U.K gilts. Hugh Hendry can be found on HughHendry.com, on Instagram and Youtube as @hughhendryofficial, as well as on Twitter at @hendry_hugh.

Comments

Transcript

  • PA
    Pascal A.
    26 September 2020 @ 11:19
    First of all I wanted to say a massive thank you for that great interview. I work in fixed income myself and finding interviews that really go into the details of fixed income seems to be a truly rare thing to me. I also find it very helpful to be given some concrete examples of past and current trades. I saw that you, Bob, replied to some of the comments. So, I want to try my luck with some questions. You said that "yield curves can't stay flat forever due to convexity and due to the math behind convexity". I don't quite understand this point. Can you go a bit more into detail on this point or can you share some reference where to look is up? Because as Alex Gurevich pointed out in his interviews the convexity on long dated bonds makes them more attractive and a premium should be paid for them which would make the long end of the curve downward sloping (which is currently the case in the swiss franc swaps curve) even if it makes it attractive to pay a steepener due to the positive carry. Moreover, I was wondering about the cost of the JGBi vx. JGB trade. If I recall correctly you buy the 10y JGBi and short the JGB for a minimum profit (in case of deflation) of 2% over the 10y that gives you 20 bps per annum. Of course you have a higher return per annum if there is inflation or if the market corrects ahead of maturity and you exit the trade. So, I assume that you have close to zero funding cost for this trade as it effectively gives a small amount of cash (101 (JGB) - 99 (JGBi)) upfront. However, I guess that the borrowing cost are not negligible in this trade and might even eat away the 20bps per annum. Can you offset the borriwng cost by lending out the JGBi? Or does the costs of the trade eat up the profit you woud make in the hold to maturity and no inflation szenario but you expect to close the trade earlier when the market corrects or your intention is to buy the free option on inflation? (If this question goes to much into the details of your trade and, therefore, you don't want to answer it I totally understand tha.) I hope that you will you be back on RV soon!
    • BT
      Bob T.
      27 September 2020 @ 22:49
      Convexity: Your points are correct. However, I don't think I can fit a convexity explanation in this box. JGBi v JGB: You are correct. There is a funding (repo) cost to this trade (lending out JGBi, borrowing in JGB to short it) which currently has been close to zero. Normally, that cost would be around 5-10bp per year. Obviously, that cost is frustrating and a negative to this trade. =>"Or does the costs of the trade eat up the profit?" No, it eats up some of the profit, but about 25% of the 2 points of mispricing. So far, our repo has been close to costless, but that is a bit of a lucky break. Normally, repo eats into your profit.
    • RD
      Rodrigo D.
      21 October 2020 @ 12:04
      On the topic of JGBi vx. JGB doesn't the (101 (JGB) - 99 (JGBi)) have to be adjusted for the Index_Ratio? Even if the JGBi is close to 99, when you try to buy it in the market you must multiply by this Index and if it is over 1, it may explain the difference between these 2 bonds. The rational (101 (JGB) - 99 (JGBi)) assumes a Index-Ratio of 1 which may not be the case. What do you think?
    • AR
      Adrian R.
      21 October 2020 @ 13:13
      Re: flat curve and convexity. I think ‘flat’ as the descriptor is referring to the lack of curvature rather than the direction of slope. A 10y v 20y v 30y fly has positive convexity because 30y has more convexity to 20y than 20y has to 10y. So 10y 20y 30y curve shape should look like a dome not flat.
  • JF
    Josh F.
    28 September 2020 @ 08:13
    Anyone care to explain the yield curve math comment? I have no intuitive sense as to why yield curves couldn't stay flat that doesn't require economics or behavioral preferences.
    • AR
      Adrian R.
      21 October 2020 @ 13:03
      A fly trade such as 10y v 20y v 30y can be put on delta neutral but has positive convexity. If the curve is flat this prices this convexity at zero, so more normally the yield curve should have curvature (like a dome, not like a cup)
  • MS
    Marcus S.
    19 October 2020 @ 23:40
    Just brilliant. Highly entertaining and not sure you can get 2 more polar opposite characters to chat about a topic as exciting as fixed income arb.
  • MH
    Matthew H.
    19 October 2020 @ 03:13
    Dream of electric sheep
  • KS
    Karl S.
    15 October 2020 @ 22:55
    This is one of my favorite RV videos. It can best be described as 60 minutes of Hugh shocked that someone can get capital where the mark to market doesn’t put that capital at risk from withdrawals.
  • TW
    Troy W.
    12 October 2020 @ 11:11
    One of the most informative and entertaining interviews I have seen for a long time.
  • BM
    Brett M.
    12 October 2020 @ 00:47
    Can you IMAGINE a sitcom where these two have to share an apartment! Non-stop fun. Imagine the scene where Hugh invites the team of strippers over and answers the door with an obvious white powdery mustache, and Bob, with his earth-tone sweater and sensible protein smoothie, is generally off-balance and wants everyone to think this over.
  • LS
    Lemony S.
    26 September 2020 @ 22:29
    If not for the Werner interview which was quite good (Hugh are you doing part 2 ever?), it's tough for most of us to suffer how sloppy Hendry looks when we truly want to take him more seriously. You can be lazy all day man, just have a modicum of professionalism for you guests at least, brother. I felt bad for Mr. Werner on that last one. If you did that, I think you'd shoot up even further in everyone's estimation, Hugh.
    • AR
      Anthony R.
      27 September 2020 @ 05:17
      Man, I have to totally disagree. I love that Hugh does not give a flying fuck about any of that packaging bullshit. He's a free man. He's made his bank and can do whatever. God bless him for it instead of being some self-important pretentious prick. Focus on content, not packaging. I've learned a lot from all quarters with that view. And will continue to. Love the hat selection btw. Hilarious.
    • ME
      Mina E.
      2 October 2020 @ 15:54
      You should read Nassim Taleb's "Surgeons Should Not Look Like Surgeons" https://medium.com/incerto/surgeons-should-notlook-like-surgeons-23b0e2cf6d52
  • NR
    Nelson R.
    27 September 2020 @ 04:06
    One of the best RV interviews of all time.
    • MM
      Michael M.
      1 October 2020 @ 12:52
      Would love to hear why you think that among so many greats
  • CT
    Christopher T.
    30 September 2020 @ 17:33
    Jimmy Fallon stays busy
  • SU
    Shakeel U.
    25 September 2020 @ 18:08
    Grant Williams is badly missed 😐
    • AB
      Andy B.
      26 September 2020 @ 00:10
      Absolutely not. This is a great discussion between two real fund managers with a proven track record. Grant would have just made a nice story with beautiful images of him looking at the sunset and wondering why gold is not trading at $20k.
    • DS
      David S.
      26 September 2020 @ 02:05
      Shakeel U. - Mr. Williams is now on other spots on the internet. You can enjoy his old RV presentations anytime in the RV library also. I enjoyed Mr Williams on RV very much as well. Things change, as the Dali Lama has said many times. We move on and enjoy each day as it comes. DLS
    • AR
      Anthony R.
      27 September 2020 @ 05:33
      Absolutely miss Williams as well, and need to go look up his new stuff. Williams being Williams is fantastic. Great in depth discussion. Class, polish and all that. But Hugh being Hugh is just as great. Totally different cats and the world is more interesting, entertaining and better for it. Hendry and Williams hanging on the beach in Cayman would be great, and I'm sure Williams would enjoy it too.
    • TP
      Tom P.
      29 September 2020 @ 21:56
      I agree, but this was a great interview. It's not often the public have access to what is basically a conversation between 2 finance nerds getting into the weeds (I say this as a proud finance nerd).
  • RD
    Ryan D.
    28 September 2020 @ 14:42
    Yo Hugh! Need those shades Bro. Where can I cop'em?
    • HH
      Hugh H. | Contributor
      29 September 2020 @ 21:29
      oliver goldsmith london
  • JA
    Joseph A.
    26 September 2020 @ 14:37
    This interview is deceptively profound and elegant in its simplicity. So much here behind the simple examples given! Key takeaway for all retail traders and it’s a pattern I have picked up time and again over the years is time horizons matter and the best traders have long term time horizons, don’t overleverage, don’t always trade and even close their funds when their framework doesn’t fit current market opportunities and sticking to strategy. The one edge retail traders have over most institutions is they don’t have the pressure to trade regularly and can choose to trade more optimally and less frequently reducing attrition from commissions and not having to compete with algos in the short term. Short term trading year around can’t ever work consistently long term because volatility isn’t high enough for long enough year around. I love that Bob suggests his fund may only make trades around once a month and even close it altogether when the trading environment is unsuitable for his strategy. This to my mind largely explains his performance and protects his long term average returns by stopping altogether not because of drawdown which is also a crucial message here. He’s stopping trading because of lack of opportunity but doesn’t mind trading through drawdown because he’s got high conviction that increased mis pricing further supports his thesis and framework that there are still opportunities in the markets that warrant adding to positions even when down 37% which although he had some stop losses involved it didn’t stop him trading as his money management and collateral retention ensured no margin calls even in a 37% down scenario. Increased mis pricing here is the same as saying that if he was happy to pull the trigger in the first place, the very fact that the mis pricing increases makes him even more interested to add. Totally understand that and I think the french insurance company example where he didn’t do business with them was right on. They were making the classic investor psychology error where fear and greed takes over at the wrong time. They were only greedy when market was doing well and fearful when it was down which is the exact opposite of what Bob needs to see from his investors and also I guess their time horizon was too short and would have been unable to understand or stomach 37 % drawdown not seeing the bigger picture. He only stops trading when there is no longer opportunity not when there is no longer risk. Bravo. So much wisdom here for those willing to see behind the deceptive simplicity reaffirming the notion that retail traders should A) lengthen their trading time horizon B) trade less often and sometimes not at all for maybe long periods C) do not overleverage. There’s a big difference between being fully invested and overexposed / correlated without realising it. Last thing you want is margin calls to force close trades just when you want to be adding to positions.
    • SS
      Stephen S.
      29 September 2020 @ 21:17
      Was thinking the same thing while listening. His reasoning and strategy seems very simple and straightforward, yet he has one of the best track records of anyone out there.
  • KA
    Kevin A.
    25 September 2020 @ 23:28
    I thoroughly enjoyed this interview. I listened to the audio without realizing that Hendry was in his beach clothes in an alley. The most brilliant interview attire ever! Bob, the only thing I wish you had discussed was repo cost and repo stability. I traded credit for a long time. We'd put on a long-short credit trade. At the worst possible moment, on the short side, we'd sometimes lose the borrow or we we would get re-rated. Do you ever have scary moments on the repo for your short leg? You didn't factor this into your P&L discussion in the interview. I am guessing it was just to keep things simple.
    • BT
      Bob T.
      27 September 2020 @ 22:55
      Yes, you are right. Repo cost is troublesome and almost always a profit reducer. However, given that we only trade government bonds around the world (no credit, no mortgages), our repo has been pretty stable. The only time for us where repo was really shaky was 2008. For that reason, we try to lock in our repo as long as the market will accept. If market would accept 5-year repo, I would do it! -Bob Treue
    • KA
      Kevin A.
      28 September 2020 @ 20:08
      @ Bob T. - thank you for replying!
  • PE
    Paul E.
    28 September 2020 @ 19:57
    "Can you lift your skirt a little above the knee" Hahaha, nice Hugh! I can see why so many of Bob's clients have stayed with him. Not only is he good at what he does, he is very straightforward and sincere in his communication. Thanks!
  • NL
    Nikola L.
    28 September 2020 @ 02:05
    great interview Hugh. thank you.
  • ES
    Eric S.
    27 September 2020 @ 18:26
    Raoul is quiet at the end of the video. Haha
    • NL
      Nikola L.
      28 September 2020 @ 02:05
      clearly he did not want us to hear what he thought about Hugh's hairstyle.
  • MD
    Matt D.
    26 September 2020 @ 03:19
    I loved this interview, thanks. All aspects - nice summary at the end Hugh of Bob, great questions. I'm surprised that not a lot of investors think it is for them - conceptually it sounds brilliant.
    • BT
      Bob T.
      27 September 2020 @ 22:52
      Despite our share price going from $1 to $15 over 20 years, Leverage + adding to losing trades + reducing winning trades + no stop losses at outset of trade + same strategy as Long Term Capital Management = marketing disaster.
  • AC
    Andrea C.
    26 September 2020 @ 16:19
    convergence trades tend to behave as short vol positions and depend on overall market participants access to liquidity (i.e mispricing tend to explode when liquidity dries up suddenly and then slowly revert back), would have been interesting to ask what Barnegat does to mitigate those exposures.
    • BT
      Bob T.
      27 September 2020 @ 22:40
      We try to have a basket of uncorrelated to negatively correlated trades. While this is easier said than done, 19 of our 20 years have been positive, so there is plenty of data to say that this seems to work. While it is not guaranteed to work every year (we were down a lot in 2008), our success rate is pretty high. -Bob Treue
  • RP
    Ryan P.
    26 September 2020 @ 12:45
    Everyone pick up the theme ? Does not try to predict timing. Uses time to arb mispricing. Literally says that over and over again .... #1 bond fund... think about the process here it will add value to your own books.
    • BT
      Bob T.
      27 September 2020 @ 17:39
      Thanks for the kind words. I am glad that point came across. -Bob Treue
  • JB
    Jonathan B.
    27 September 2020 @ 16:49
    Having known Bob for several years (we also now live in neighboring towns) I can say he is 100% class act and one of the good guys in the industry.
  • AE
    Andy E.
    27 September 2020 @ 02:20
    Love Hugh’s interviews- more please.....precious metals and miners....
  • DT
    Daniel T.
    26 September 2020 @ 20:59
    If there is any takeaway for everyone from this interview it is that find what works for you and stick to it.
  • MA
    Mark A.
    26 September 2020 @ 18:35
    Is Hugh in the outside loo? And eating too! Good interview - I really enjoyed it
  • JP
    John P.
    26 September 2020 @ 16:14
    Great interview! I don’t think that the strategy or fund will be useful to more than a handful of institutional investors .. as indeed is evidenced by the size of the fund. Nevertheless.. an interesting and thought provoking hour.
  • GD
    Gabriel D.
    26 September 2020 @ 14:22
    do robots dream of electric sheep?
  • dd
    david d.
    26 September 2020 @ 11:38
    is that fat stains?
  • TS
    Theodoros S.
    25 September 2020 @ 17:54
    Nice Interview. For the common investor, if we were to trade the idea of shorting UK Index Linked or "linkers" yields would the following etf be a good short. ETFS LSE | INXG | IE00B1FZSD53 | GBP Thank you!
    • SM
      Sam M.
      26 September 2020 @ 04:19
      That fund is long real yields and has a duration of about 22 years according to Morningstar (the interview was about shorting break-even inflation at 5 years not going short outright real yields) - so it would all depend on what you were actually wanting to trade. You can see indicative yield curves plotted here (https://www.bankofengland.co.uk/statistics/yield-curves) and the implied inflation / inflation forwards have interesting shapes that could give trade ideas.
  • TS
    Timothy S.
    25 September 2020 @ 07:07
    Can someone lay out the uk linker trade they were talking about? I dont quite understand how you get 3.5% minus inflation.
    • AC
      Alex C.
      25 September 2020 @ 10:40
      I'd need to re-watch for the exact numbers but from memory the theory is that the UK government requires in law that UK Pension funds hedge out inflation through purchasing linkers/inflation linked gilts (RPI). There is a consequent lack of supply for this demand which clearly pushes up price and artificially lowers YTM. Therefore, the theory is, if you short the linker and long the standard GILT of the same maturity those prices converge to maturity and you profit the yield distortion.
    • SM
      Sam M.
      26 September 2020 @ 03:43
      He was saying the break-even inflation rate between physical nominal bonds and physical inflation bonds (roughly nominal rate - real rate) for 5 year maturity is 3.50%. Since nominal rates are approximately zero that means real rates are approx -3.50% so you need inflation to be 3.50% or greater for the Inflation Bond to be a better instrument. If the inflation bond looks expensive you could short it and buy the nominal bond and hold to maturity. He is shorting inflation for 5 years and getting paid 3.50% for taking the risk.
  • OC
    O C.
    26 September 2020 @ 01:39
    Fascinating conversation. If one thinks about this in the context of Ed Harrison's interview with Ben Inker, it certainly gives one areas to invest in a world where real returns on asset classes are likely to be low going forward. Esoteric for sure, but in a world where the investing space seems almost like a bubble/crowded to me -- "invest in gold, silver, miners, bitcoin, real estate, and emerging markets" -- this interview is certainly a refresher. I wish I was smart enough to figure out those kinds of trades.
  • MJ
    Marcus J.
    26 September 2020 @ 00:23
    "do androids dream of electric sheep?"
  • DS
    David S.
    25 September 2020 @ 22:36
    Most enjoyable interview. I would not change a thing. It was fun watching Mr. Hendry’s incredulity when Mr. Treue discusses patient investors, patient trades without predicted catalysts. It is hard to believe that it exists in modern macro. It works for the Barnegat Fund Management because Mr. Treue is smart, humble, and sincere. He tells his potential clients exactly what to expect a la Mr. Parrilla. No one can dispute the results. Lots of volatility to trade into year end. Good luck to all. DLS
  • JF
    John F.
    25 September 2020 @ 21:40
    The Mad Hatter of RealVision strikes again.
  • NP
    Nick P.
    25 September 2020 @ 09:56
    Perhaps put this chat in the old boy's history section. Very boring to listen to (unverified) trades made 15 years ago.
    • BT
      Bob T.
      25 September 2020 @ 20:22
      I agree that I hate listening to people talk about old winners. No one talks about old losers. I brought up the old TIPS v Treasuries trade because it is simple to understand and illustrates some important points on how our trades work. I also tried to highlight a trade where we lost money (UK Real Rates). Lastly, I tried to illustrate a current trade (Japan bonds). If you want verification, here is the link to FT articles from the time https://ftalphaville.ft.com/2010/09/14/342751/who-played-the-largest-ever-arbitrage/ https://www.ft.com/content/a5aa3c38-c111-11df-afe0-00144feab49a https://www.ft.com/content/a9832c1e-c109-11df-99c4-00144feab49a -Bob Treue
  • BC
    Brandon C.
    25 September 2020 @ 13:09
    Great guest! Would have loved to hear about buying US Treasury basis in March of this year.
    • BT
      Bob T.
      25 September 2020 @ 20:15
      Barnegat looks at bond v futures basis trading all the time and it is a portion of our portfolio, but a much smaller portion than other fixed income funds. Our trades are much more long-term. We are not as good at shorter term trades like bond v futures, so for the good or for the bad, we did not suffer losses there, nor enjoy the snap back. - Bob Treue Thanks for the kind words.
  • MS
    Mark S.
    25 September 2020 @ 19:50
    Is Hugh eating a sandwich? Hahahaha
  • BK
    Bruce K.
    25 September 2020 @ 19:10
    Really, REALLY fascinating discussion! Great to hear such a "bleeding edge" dialog on fixed income.
  • RK
    Robert K.
    25 September 2020 @ 18:03
    Three cheers for Bloomberg machines in the public library!
  • CD
    Carl D.
    25 September 2020 @ 15:56
    Hugh's interviews are the best, amazing guest
  • SO
    Sebastian O.
    25 September 2020 @ 15:40
    Amazing, I do not understand a single word ... no joke ... but I know nothing about this topics and kinda trades :)
  • HK
    H K.
    25 September 2020 @ 13:51
    We need more of the fixed income RV, FX options and FX points traders in g7 and EM as well ... great interview
  • TE
    Tom E.
    25 September 2020 @ 12:09
    Peach of an interview. Wonderful.
  • KD
    Kelley D.
    25 September 2020 @ 11:50
    excellent interview ...my take away, besides specific trades., the real arb is between permanent capital (berkshire etc) and hot liquid capital (etf's)....hence the ability to make time your ally..not your foe.