Going Nowhere

When I started my career in the financial markets in 1985 at Daiwa Europe Ltd, market knowledge and experience were very limited. Veterans were 26 years old with 3 years experience trading Eurobonds. As raw recruits new to the industry, the 5 minute executive decision that determined whether you were to be on the sales or trading desk was farcical in today’s eyes. I was last in the queue to have my career path chosen by Kiyokawa-san. “You trade US treasuries………!” Ok, great, so I got to sit over in the bond corner, splendid. Long before the days of Bloomberg and the internet, your ONLY real reference point was Marcia Stigum’s ‘The Money Market’, still in print today. 



Despite a full yield curve of maturities to trade, the headline issue that everyone knew was ‘the long bond’, the longest maturity US government bond.


Treasury Bond 11.25% 02/15/2015


In February 1985, this was the newly issued long bond, 11.25% for 30 years. The next 4 long bonds were:


T 10.625% 8/15/2015


T  9.875%  11/15/2015


T  9.25%     02/15/2016


T 7.25%      05/15/2016


Arguably the 11.25% was my designated starting long bond that my financial planner showed. As most US treasury traders will know, the saying is that when your long bond redeems at 100 after 30 years, your time in the market place is up too. Which means that I have about a year or so left!


In the first 15 months of my career trading US treasuries at Daiwa Europe Ltd, the long bond coupon rates dropped 400 basis points. As an aspiring primary dealer with a Japanese trade surplus to be invested in US Treasuries, Daiwa Securities were at the fore front of this raging bull market. Having no other experience to relate to, this appeared to me to be the norm. As a lowly trainee trader, one of my daily tasks was to draw the Japanese candle chart of the long bond on graph paper and maintain this on the wall in the trading floor. Over the course of the day, the Japanese traders, salesmen and managers would saunter over to view my handy work, chain smoking cigarettes where they would “analyse” the pattern and nod knowingly.


The pattern was fairly clear to the naked eye, it was a good ol’ fashioned ‘moon rocket’ pattern. During the spring of 1986, the 9.25% long bond had a period where it rallied 27 points in a month by which time I was now updating my chart standing on a stepladder, borrowed from the caretaker. When the graph paper touched the ceiling I asked my Japanese boss what I should do. He said “take it down, fold it up and keep it, you will never see that again”.  He was a smart man, Hibino-san. Today, Takashi Hibino is president and CEO of Daiwa Securities worldwide.  Of course, I have long since lost that chart unfortunately but its memory lives on.


When you look at the legendary early hedge funds of Soros, Tudor and Moore and read of their 30% annualised returns you cannot help to be somewhat in awe. But those were clearly different times, USDJPY dropped from 260 to 130 between 1985 and 1987. Currencies and long bonds were moving 30% in nominal terms, no leverage needed if you got it right. It’s a surprise these guys weren’t up 300% in many ways.



Those days are a far cry from today. The chart above is the front Euribor contract for the last two years, a trading favourite of yesteryear of the largest European hedge funds. It has had a 15 bps range in that time. These days traders often have to check the clock on their monitors to make sure the frozen prices are actually “live”. There are young US treasury traders today who have never seen a Fed rate movement, last in December 2008 but expect to in the coming years. The considered consensus belief is that after this period of zero rates in the developed world, judged crucial to handle the 2008 crisis, there will be a normalisation. As growth picks up, unemployment drops, interest rates will rise accordingly. While Japan and Europe are nowhere near this point, the focus on the Fed and the BOE is not if, but when and by how much they will raise rates.


Zero interest rates for over 6 years have had a dramatic effect on asset prices. Bonds, equities and property have all recovered dramatically since the dark days of 2009.  We are now at levels where the potential return is sharply at odds with the risks being taken despite the stellar 5 year track record.


                                                                                                Source: Hussman Funds

John Hussman has been pointing out to us on a weekly basis using every chart overlay he can put his hands on that the likely 10 year equity returns from here will be negligible at best. History tells us that if the 10 year horizon shows a weak return profile then the odds of a severe drawdown in that time are high. While I am cognisant of history and that ‘things might not be any different this time’ in the eventual outcome, I do think that the world has reached an interesting stage, namely the demographic debt point.


Albert Edwards of SG fame subscribes to the debt deflation catastrophe with corresponding abysmal low forecasts in the equity markets but others think it will be business as usual and the S&P500 can only march higher. As the old saying goes “Opinions are like a…holes”,…”everyone’s got one”


My opinion which is hardly rocket science is NOTHING MUCH HAPPENS for 10 years or more.

  • Interest rates stay at zero
  • Bond rates stay near zero
  • Corporate spreads stay compressed
  • Equity prices stay elevated with the occasional 5% down scare but go nowhere
  • Property does the same as equities

We have the occasional hiccup when people think that rates can actually go up only to find the equity market has a quick 5-10% shank like last month and then rates fall again and the equity market stabilises but net/net we don’t go anywhere. Why? Because our debt build up, whether poor fiscal policy or unavoidable demographic aging issues has reached a choke point. That point is where the economy finds it hard to grow above its debt accumulation even with low interest rates. The size of the debt means that the economies are more sensitive to interest rate rises than ever before. Everyone can discuss they learnt the Japanese lesson – that of doing too little too late is not acceptable – but it is happening in Europe as well now. Does anyone really believe corporate US or UK can go back to 2007 interest rate levels and the economy will be just fine and dandy. No, of course not, so we console ourselves that the interest rate cycle will just be lower than normal in the future. Everyone can assign their own probabilities to potential outcomes to find the best portfolio expression of risk/return:

  • Go nowhere as above = Negligible returns in any passive investment
  • Policy error of interest rate rises that chokes economy = assets collapse
  • Low interest rates = inflationary spiral of 1970s style
  • Interest rates normalise, Goldilocks scenario = assets continue to thrive

Of course there are variations on these themes. Everyone wants the Goldilocks scenario and most people hope and expect this to materialise in the end, so they put too high a probability on this maybe than is warranted. The ‘doomsters’ are thinking a collapse is coming and have a wide audience and all the historic evidence to back this up. Few worry about 1970s inflation but surely it’s the best way to clear the debt pile? My belief is that the ‘Go Nowhere’ camp which is thriving in Japan and reaching into Europe is being underestimated as the most viable probability. I am not saying it is going to happen, just that it has to be given a sizeable vote. Obviously not many asset managers, let alone people on the sell-side can really make money by arguing that we will go nowhere as you can imagine. So what do you do if the next ten years of returns are going to look like this?




We believe the best approach is to focus on a rotating dividend strategy which combines gaining income with a trading approach.



With the scenarios described above in mind, we set out to develop a strategy that focusses on:


1. Buying relatively high dividend paying stocks at the low point in their cycles when they are cheap relative to the broader market and selling out once they’ve re-valued higher.


2. We wanted to build a strategy that could take advantage of short term cyclical moves in stock markets, so that whilst markets might end up going nowhere over the long term, the strategy could take advantage of shorter term cyclical fluctuations.


3. Given the importance of dividends and the re-investment of dividends to achieving attractive total returns longer term, the strategy also needed to capture as much by way of dividends as possible, without falling into the trap of chasing dividends at all costs.


This latter point meant we needed to develop a robust screening process to ensure we only selected dividend stocks that met strict quality benchmarks, whose long term fundamentals were still intact.


The rationale behind the strategy made sense to us across the range of possible scenarios which could play out, with returns coming from a combination of capturing dividends and cyclical capital gains, as well as the re-investment of those gains and dividends back into the strategy.


The strategy would concentrate on large cap and larger-mid cap stocks (minimum £1 billion market cap) and use a purely quantitative based approach to rank every stock in the available universe and implement selection systematically.


Currently we run the HDVM ® strategy on the FTSE 350, but the strategy has been designed to work across a wide range of equity markets:


1. Every stock is scored and then ranked based on its dividend, value and performance qualities.


2. In the FTSE version, the strategy selects the ten highest ranked stocks from the FTSE 100 and the FTSE 250, respectively, subject to a diversification rule, which ensures a maximum of one stock from each industry group is selected from each index. Total of 20 stocks in a portfolio.


3. All stock holdings are equally weighted.


4. The portfolio is then 50% hedged (on a beta-adjusted basis) to reduce volatility and drawdowns relative to the index.  


We believe this strategy has the potential to deliver better risk-adjusted returns than many traditional equity index opportunities, whichever of the four scenarios outlined above play out.


In the most likely scenario, where equities ultimately go nowhere over the next ten years, this strategy may well stand the best chance of delivering an attractive return to investors. It will take advantage of the shorter term cycles that will inevitably play out by consistently buying stocks at the low point of their cycles when they are out of favour relative to the broader market and holding them through the price mean-reversion process before selling out and recycling proceeds into the next set of value opportunities.


In a long term sideways or range-bound market, dividends will play an even more important role for those investors targeting positive returns and over the next ten years we expect the harvesting of regular dividends and the re-investment of those dividends will significantly add to an investor’s total return.


Over the next decade, investment markets threaten to challenge both investors and conventional wisdom. Our belief is this strategy may help investors to more effectively navigate the pitfalls and opportunities they face.


If you click here you can see Ben Davies CEO & Co-founder presenting the SG Hinde UK Dynamic Equity ETN (50% Hedge), listed as HALF.L on the LSE.


Those interested in learning more about Hinde Dividend Products and the HALF.L ETN please click here.  


What are the main risks to be aware of?

  • Your capital is at risk. The stocks of the Dynamic Portfolio can be volatile and it is possible to lose your entire investment.
  • Performance risk. The stock selection process, and the resulting performance is the sole responsibility of Hinde Capital. As such, if their allocation proves unsuccessful, there is a risk of poor performance in the ETN.
  • Absolute return. The inclusion of the Beta Hedge means that the ETN will not benefit from the full rise of the Dynamic Portfolio.
  • Counterparty risk. If SG Issuer and Societe Generale were to default or become insolvent, the ETN will terminate immediately. The amount that you receive back on your investment will depend on i) the market value of your investment at that time and on ii) the value of the Collateral Assets at the time of default. You may receive back less than your initial investment.

Full details of the SG Hinde UK Dynamic Equity ETN (50% Hedge), the issuer and the risks are available in the Product Guide and Final Terms. Please ensure you read these prior to investing.  


How to purchase the SG Hinde UK Dynamic Equity ETN (50% Hedge):


The SG Hinde UK Dynamic Equity ETN (50% Hedge) is listed on the London Stock Exchange and can be purchased by professional and sophisticated retail investors through a UK stockbroker. We do recommend that professional advice is sought prior to investing. Holders of the ETN will pay an annual charge equivalent to 1.3%, which is calculated and deducted daily.


Sophisticated retail investors can invest in HALF.L through the stockbroker accounts, in their SIPPs and ISAs and it will be available via portfolio building program so investors can grow their investment through this equity income strategy with relative peace of mind about stock market debacles such as 2008.






This communication issued in the U.K. by Hinde Capital who is authorised and regulated in the UK by the Financial Conduct Authority. FCA number 471754.   The SG Hinde UK Dynamic Equity ETN (50% Hedge) (the ETN) is directed at professional clients and sophisticated retail clients in the UK, who have a good understanding of the underlying markt and characteristics of the ETN.


It is important that you appreciate at the outset that you could lose all of your invested capital when investing in these products. You should be satisfied that they are suitable for you in the light of your circumstances and financial position. If in any doubt, please consult an appropriately qualified financial advisor. We recommend that retail investors seek independent professional advice prior to investing.   You should not deal in these products unless you understand their nature and the extent of their exposure to risk. The value of the product can go down as well as up and can be subject to volatility due to a range of factors which include price changes in the underlying instrument and interest rates. Final Terms are published for this security detailing its specific characteristics and its pay-off at Maturity, and the product features given in the Final Terms are prescribed by the approved Base Prospectus. Both documents can be found at www.sglistedproducts.co.uk


This ETN is a security that is listed on the London Stock Exchange and is issued by SG Issuer via an Issuing Programme which is approved by the UK Listing Authority. SG Issuer is a 100% subsidiary of Societe Generale. As the Issuer of the ETN, if SG Issuer and Societe Generale were to default or become insolvent, the ETN will terminate immediately. The amount that you receive back on your investment will depend on i) the market value of your investment at that time and on ii) the value of the Collateral Assets at the time of default. You may receive back less than your initial investment. This ETN is not covered by the provisions of the Financial Services Compensation Scheme (“FSCS”), nor any similar compensation scheme. Societe Generale is the only market-maker for SG ETNs and Trackers and therefore the only liquidity provider. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the index tracked by the product; a failure in the LSE, Societe Generale systems; or an abnormal trading situation or event.

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