Wounded Hedge Fund Titan Crispin Odey Isn’t Celebrating His Roaring Comeback

(Bloomberg) -- Considering he just pulled off a stunning turnaround, Crispin Odey sounded unusually restrained.

His main fund gained 53 percent last year as his predictions of doom finally panned out and global equity markets plunged into chaos. Yet those gains aren’t nearly enough to make up for prior losses. And with markets already showing some signs of strength again and the U.K.’s messy divorce from the rest of Europe forcing him to cut one of his profitable bets, the boisterous Brexiteer knows it’s too early to pop the champagne with his investors.

“I will have a party for them in the summer of next year,” said Odey, who turns 60 this month, before erupting into loud laughter. “That will be a time to party.”

Odey bet the farm -- and almost lost it -- three times in a career spanning nearly 30 years, often with sweeping wagers that the market consensus was wrong. While that strategy can rake in eye-popping gains, the losses can be equally stunning: He needs to generate an additional 90 percent just to recoup losses from the three years through 2017.

In an interview ranging from his views on the market to Brexit to how quants are making life difficult for stock pickers, Odey insists last year’s selloff is just the beginning of a slump that will see him vindicated once again. But after the violent ride of the past years, Odey may have become too risky for some investors.

“It’s difficult to support his volatility,” said Erwin Brunner, founder of Zurich-based BrunnerInvest, which once allocated money to Odey’s fund. “You can also invest in Bitcoin. You don’t know what you are buying either.”

Odey is the epitome of a contrarian, someone who takes a big, directional bet against the popular view and then sticks with it. But too much conviction can get in the way of cutting losses. David Einhorn, a Tesla Inc. bear, just closed out the worst year since he started his firm more than two decades ago. Bill Ackman had several short wagers that went painfully wrong, including a very public bet against Herbalife Nutrition Ltd. Mark Hart wagered against China for years until he finally gave in.

“I think I can remain at an uncomfortable place for a very long time, and ultimately that is quite valuable,” Odey says. Reminded of the famous saying by John Maynard Keynes that the market can remain “irrational longer than you can remain solvent,” he says that was relevant in 2016 when his fund was in trouble. That’s not the case now.

‘Your Turn’

As he sees it, equity markets have reversed momentum and credit spreads are widening. In a warning that has remained a constant feature of his letters to investors over the last four years, he predicted that a 50 percent decline in equities is possible.

“I had my recession,” said Odey. “Now it’s your turn.”

Odey’s fans and critics alike describe him as bold, but lacking controls. In the middle of the financial crisis, when the representative of a family office asked about risk management, Odey told him that he was just another “crappy” investor and even called him a “jerk.” In the interview, he pointed to hundreds of millions of dollars of his personal wealth that he invests alongside clients. “That’s the risk management.”

“His view of diversification or risk reduction is very, very different from what your typical fund manager would have,” said Richard Philbin, chief investment officer of Wellian Investment Solutions, which no longer invests in Odey’s fund but has client money in other pools run by his firm. “That’s what ultimately makes him the person and the enigma that he is.”

Born into a well-known family -- his grandfather a Tory MP, his mother from an old-line mercantile family -- the University of Oxford alumnus has stomached excruciating losses before. He started his firm in 1991 -- an idea sparked by his wife Nichola Pease -- and initially managed $150 million, including money from hedge-fund titans George Soros and Paul Tudor Jones.

‘Proper Mountaineering’

After a wildly successful start, bets on interest rates and U.K. bonds crashed in 1994 when the U.S. Federal Reserve unexpectedly doubled interest rates. Clients fled and assets slumped to $50 million from $1 billion. Over the next decade, he bounced back with an almost six-fold return.

“That was a proper mountaineering,” Odey says. “This one is a hill climb.”

In 2005, he published a report titled “Crunch Time for Credit?” that flagged the emergence of a credit bubble and predicted a market collapse. Again he was early, his fund losing 1.5 percent in 2006. A year later, it surged 55 percent and another 11 percent in 2008.

Yet none of these setbacks matched the magnitude of his most recent woes, which began in 2015 and accelerated from there. China was slowing and the U.S. had begun to raise interest rates. Odey started to bet against emerging markets, but those instead surged, triggered by what he calls “blatant gerrymandering” by central banks.

The fund’s decline had a huge impact on his company, which is run from a Georgian town house in London’s Mayfair district. Assets shrank to about $5 billion from $13 billion in 2015. Odey himself runs about $1.5 billion of that. His flagship European Inc. fund is down to 231 million euros, from 3.1 billion euros at the end of April 2015.

Odey courted potential investors, to no avail. At one meeting in 2016 at a Michelin-starred restaurant, he hosted a small group over lunch and three bottles of fine wine. Throughout the meeting, he kept coming back to the same argument -- he was right and the market wrong, according to a person who attended. The investors left unconvinced. Odey’s fund lost half its value that year and 22 percent the next.

‘Twice as Bad’

Still, to Adrian Flook, a former member of Parliament who has invested some of his pension money in the fund as insurance against market chaos, Odey has proven that he can claw victory from the jaws of defeat.

“Cutting and running at the bottom is twice as bad as investing at the top,” Flook says about his decision to stick around. “The question is, when the market does start to agree with him properly, can he make up? I think he will. And his colleagues think he will.”

Just how challenging the climb can be was on display as stock markets made up some of their losses this year. On Tuesday, lawmakers in the U.K. dealt Prime Minister Theresa May a humiliating defeat in rejecting the Brexit deal her government brokered with the EU. In a sharp about-turn of his long-held views and bets, Odey said before the vote he no longer believes the current set of politicians can deliver Brexit. He has unwound his bet against the pound because of the risk of the currency rallying.

“You can’t expect a Brexit result from a remain parliament,” said Odey, who is known as a top fundraiser for the Brexit campaign and a leading contributor of campaign cash to the pro-Brexit side. He remains net short U.K. equities.

Odey made about 220 million pounds ($283 million) in a day when the British currency slumped following the decision to leave the European Union. The trade continues to cause outrage on social media, because Odey is seen as profiting from problems at home while pushing the country towards uncertainties. He lost that money in a matter of weeks as markets rallied.

Stuart MacDonald, who helps hedge funds raise money as managing partner at Bride Valley Partners, said not many can hope to recover from losses like those Odey suffered. But while other well-known hedge fund managers have been throwing in the towel in recent years, he expects Odey to keep fighting for a rebound.

“Wouldn’t that be a more elegant way to round off a long career than to simply say ‘Oh my gosh, I can’t cope with the markets’?” MacDonald said.

To contact the reporter on this story: Nishant Kumar in London at nkumar173@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Christian Baumgaertel, Keith Campbell

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