Hedge Fund Managers Are On Your Side (Hugh Hendry), CDS Thoughts

Hugh Hendry, hedge fund manager at Eclectica Management, wrote an interesting piece in the Daily Telegraph (h/t Trading Trophies).
"You don't know me; we've never met. But I fear you are being encouraged to dislike me. Let me explain: I'm a speculator. I manage a hedge fund. Apparently I profit from your misery. Accordingly, our political leaders are keen to see the back of me.

Only yesterday, Germany and France were calling for the "fastest possible" adoption of new rules to put an end to financial speculation. But before you write me off I ask that you listen to my side of the story." [read full article at Daily Telegraph]

How long will this debate go on for?  I agree with him that speculators are not to blame for anything.  In my opinion, if there was more price transparency when dealing with credit default swaps and/or other over-the-counter hedging vehicles on public company debt (now sovereign/munis), nobody would have an excuse to blame anybody for anything.  I remember Soros made a speech that CDS should be outlawed because bond investors had a bigger incentive to bankrupt a company than reorganize ["It's like buying life insurance on someone else's life and owning a license to kill him"-Soros].  Soros, John Paulson and Burry of Scion Capital made a lot of money buying CDS on subprime mortgage portfolios.  CDS gave signals of the coming mortgage slowdown -> meltdown in 2006.  When things start to turn for the worse, price signals in the private financial insurance market matter to not only the hedge fund manager hedging or speculating on a $2B default, but as we've seen, everybody who lives on planet Earth who has a job or owns a business/investment.  If CDS started trading on the secondary market would the market become too efficient?

Hugh Hendry also spoke recently at the 2010 Russian Forum with Marc Faber, Nassim Taleb etc (link).


  1. From what I understand, CDS is a speculator's dream. It's like an option, limited downside, crazy upside, and you pay for the Theta in increments over time. I don't have the data to do the math to tell what the rate is relative to the cost of Theta within the 14 day ATR of the VIX, in other words, how the carry cost of CDS relates to options, but I imagine from AIG going bankrupt that there was a discrepancy. Mark this to model beyotch!

    Once (if) it goes retail the party's over because premiums will be bid up to the point where the risk/reward becomes like vanilla options. This may actually be a good thing.

  2. not if they can profit off retail buying and selling it...

  3. So just like Market Makers and pros shorting Iron Condors as a way to fade volatility you'll have CDS spreads (short Sovereign CDS, long Corporate) as a way of selling Default risk. This retail CDS idea just might be the biggest quant opportunity since the invention of CDS as the volume increases and edge moves to the short-side.


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