He's lost £200m in a year - so has Britain's star hedge fund boss Crispin Odey lost his golden touch?
Crispin Odey looked relaxed sitting outside Scott’s restaurant in the last of the summer sun in 2015.
Dressed in a smart suit, the hedge fund manager – best known for calling the top of the last bull market in 2007 by shorting banking stocks – had spread on the table sheets of paper describing details of his firm.
He appeared to be in a good mood as he chatted to a business associate and they shared a bottle of red wine. At the table next to him in this Mayfair eaterie was Kate Moss’s hairdresser.
Prophet of doom: Crispin Odey is banking on the next downturn
But Odey’s laid-back attitude gave no indication of the turmoil his flagship fund had put investors through. It had tumbled 20 per cent in May – a terrible performance given most of his rivals were in positive territory for the year.
Odey’s fund had got into trouble after taking some big short positions – where you bet that a share price will fall – at the beginning of 2015.
That stemmed from Odey’s belief that the global economy was headed for a recession ‘that will be remembered in a hundred years’ and would leave stock markets facing devastation.
Central to the 57-year-old’s theory was the fact that central banks were running out of options to stimulate global economies, many of which would be likely to be pushed into recession following a rout in commodity prices.
Odey said in a letter to investors in January 2015: ‘We used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to counter the effects of a slowing China, falling commodities and emerging markets and the ultimate first world effects.
‘This is the heart of the message. If economic activity far from picks up, but falters, then there will be a painful round of debt default.’
Back then, rival hedge fund managers thought Odey – who is estimated with his wife, fund boss Nichola Pease, to have a fortune of around £900million – was just ‘talking up his own book’ to get himself out of some tricky investment positions.
Last year giant brewer InBev launched a £75billion raid on SAB Miller, the FTSE 100-listed brewer
And they seem to have been proved correct – a few months after Odey’s warning, the world’s equity markets flirted with record highs. The FTSE passed 7000 for the first time on April 10 and the Dow Jones Industrial Average closed at an all-time high of 18272.56 in late May.
As summer stretched on there were already subtle signs that perhaps the economy was somewhere near the top of the cycle.
For example, in July, McQueen – a boutique advisory firm set up by some former HSBC investment bankers – sold itself to Houlihan Lokey, the US mid-market investment bank for an estimated £20million. While this was quite a small deal, it is significant because corporate financiers tend to be particularly good at picking the top of an economic cycle to sell their own businesses.
Then, in September 2015, Anheuser-Busch InBev, the giant brewer backed by Brazilian private equity firm 3G, launched its £75billion raid on SAB Miller, the FTSE 100-listed brewer.
This kind of mega-cap deal-making is a sign of corporate confidence, but it is also often considered by many City experts as an indicator of a peak in economic activity as desperate chief executives look for a way to rejuvenate flagging earnings growth.
Indeed, the last time InBev carried out a mega deal it was back in May 2008 just before the financial crisis hit full throttle.
The Belgian brewer launched its £31billion pursuit of Anheuser-Busch and, a few months later, Lehman Brothers imploded.
Late last year, debt markets were certainly starting to behave in a similar way to 2007, the height of the credit boom.
According to bankers, the world’s largest private equity firms were able to borrow between seven and eight times their earnings to carry out audacious takeover deals.
These multiples of debt haven’t been seen since the mid-noughties, when private equity firms tried to buy some of the FTSE 100’s largest companies, such as Sainsbury’s and Alliance Boots.
Odey’s apocalyptic warning even looked like it might come to fruition in January. Debt markets seized up, amid fears rising credit costs were likely to lead to lower profits.
Bank shares tumbled and by the end of January, most of the world’s stock markets had entered a technical bear market having fallen 20 per cent from last year’s record highs.
Housing market: Odey took a short position on housebuilder Berkeley Homes – essentially betting on the property bubble bursting
Odey, who lives in Chelsea and has a second home in rural Gloucestershire, took a short position on housebuilder Berkeley Homes – essentially betting on the property bubble bursting.
But so far any dent in market fortunes have proved just short-term glitches.
Since February, stock markets have rallied leaving Odey nursing more losses. But bears like him are sticking to their argument that the global economy and stock markets are at the top of the cycle.
While Odey refrains from predicting another financial crisis, he ominously declared in a private January 2016 letter to investors ‘it is getting interesting’.
But in a rare sign of contrition he appeared optimistic, at least in the short term, about the US economy, arguing gross national product, employment and wages were all growing faster than the market was expecting.
Odey’s gloomy outlook on the world economy came through when he opined about China, the main driver behind the global commodities boom, world economic growth and stock markets for the past 20 years.
‘What China needs, given the over-investment in non-productive assets estimated at £1.2bn a year for several years, is a deep recession, the writing off of several trillion dollars of debt and the refinancing of the banking system,’ he wrote.
Odey added: ‘You cannot do that without interest rates at almost zero and a weak exchange rate.’
But for the moment it would appear Odey has failed dismally to call this ‘top’ of the cycle.
There’s still time for him to be proved correct. The big question, though, is whether the charismatic hedge fund manager is brave enough to stick to his guns given his fund plunged by as much as 31 per cent this year.
Well, despite seeing an estimated £200million wiped off his own wealth, it would appear he is.
In his March letter to investors, Odey predicted that there would be a new wave of cash calls from the banks and concluded ‘the disconnect between travelling and arriving may be coming home to roost’.