Mr Hendry’s credit fund is constructed from a portfolio of short positions against highly cyclical Japanese corporate credits that have high exposure to Chinese demand.
Hendry has long had a negative stance about China. Hendry thinks that the Chinese are great at creating GDP growth without actually creating any wealth. Like Jim Chanos, Hendry is skeptical that China is all about mindless construction of condominiums and office towers that will continue to be unoccupied for years to come.
Hendry took a unique approach to profiting on the demise of China in that he feels that Japanese companies will be hardest hit. In addition, it is difficult or impossible to short Chinese companies, meaning that Hendry has had to look for creative ways to bet against China.
He has been buying credit-default-swap protection on bonds issued by Japanese industrial companies such as JFE Holdings and Nippon Steel, which have benefited from China’s construction boom. Hendry is convinced that Japanese banks are selling such protection too cheaply. Nippon Steel CDSs, for example, cost 57.25 basis points on January 7, about a quarter of their high of 215 basis points on Feb. 17, 2009. (A basis point is 0.01 percentage point.)
"I see Japan as a nuclear bomb strapped onto the chest of the global economy,” Hendry says. “They’ve got uranium -- which is, they sell credit protection: CDSs. I’m the other side of that.” If the Japanese corporate bond CDS spreads widen to equal or surpass their record highs of 2009, Hendry’s fund could rise by as much as 50 percent, he says.
It is unclear whether Hendry's thesis has played out or whether Japanese companies have struggled in the wake of the Fukushima nuclear accident.