Bloomberg News

Crispin Odey Bets on Banks as Hedge Fund Yields 24%

January 06, 2013

Crispin Odey is fumbling around a storage room in a Georgian town house in London’s Mayfair district, home to Odey Asset Management LLP, his $7 billion hedge-fund firm.

Clattering through old computers, boxes of books and forgotten oil paintings that lent a genteel air to his offices, he’s fishing for the book that shows he was one of the earliest investors to spot the financial crisis, Bloomberg Markets will report in its February issue.

More from the February 2013 issue of Bloomberg Markets:

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Odey emerges from the room brandishing “Crunch Time for Credit?,” a 250-page report he commissioned and had published in 2005 charting the emergence of a credit bubble and predicting a market collapse.

“See how terrible we are!” Odey says with undisguised sarcasm. “We were too early!”

In his suspenders and pinstriped suit, Odey, 53, hardly looks like a renegade investor. Yet in 20 years of managing his hedge fund, Odey has stood out for contrarian bets that produced outsize gains.

His flagship $1.8 billion Odey European Inc (ODYEDMI). fund returned 24.1 percent in the first 10 months of 2012, making it No. 2 in the Bloomberg Markets ranking of the best-performing hedge funds in Europe and No. 6 globally.

Odey has chalked up spectacular losses, too. His 2012 gains are a stark change from the year before, when his fund was down 20.3 percent after wrong-way bets on British banking stocks such as Barclays Plc (BARC) and on British Sky Broadcasting Group Plc (BSY), the U.K. broadcaster partly owned by Rupert Murdoch’s News Corp.

‘Rarely Wrong’

“I am very playful,” he says, scribbling in a Moleskine notebook that rests on a mahogany table befitting his family pedigree. “I needed to show my clients that it’s not the volatility that’s important. It’s the returns.”

Odey’s flagship fund made compound annual gross returns of 13.5 percent from its inception in 1992 to Oct. 31. With more than $180 million of his own money invested in the fund, Odey isn’t content with grinding out single-digit, low-risk returns that often pacify pension funds and other institutional clients.

Instead, he makes bets to maximize gains. “His views may be off in timing, but they are rarely wrong from a fundamental perspective,” says Mattia Nocera, managing director of London-based Belgrave Capital Management Ltd., a unit of private bank Banca del Ceresio SA, which has invested in Odey since the beginning and had $100 million in his funds as of the end of November.

Cluckingham Palace

Odey himself combines the trappings of old money with the flash of the new. Having profited enormously from his unorthodox bets, he’s not shy about his wealth. From April 2008 to April 2012, he paid himself at least 91 million pounds ($147 million), according to public filings.

Odey also doesn’t seem to mind being the poster child of hedge-fund excesses that have become tabloid fodder. In 2012, he got planning permission to build a 130,000 pound Palladian-style chicken house on his country estate a two-hour drive northwest of London.

Dubbed Cluckingham Palace by the Daily Mail newspaper, Odey’s poultry “temple” will be adorned with Greek statuettes as envisioned in architectural drawings.

“It’s lovely being new money,” he says, chuckling. “You can do anything with it. You can always get planning permission for a chicken hutch. You can’t always get planning permission for a temple.”

Self-Made Money

Odey is a study in contrasts.

With his upper-class accent and horn-rimmed glasses, Odey might sound and look like a conventional toff: Tory MP grandfather, mother from an old-line mercantile family; boarding school at Harrow, followed by the University of Oxford; erstwhile donor, to the tune of more than 240,000 pounds, to the Conservative Party of Winston Churchill and Margaret Thatcher; owner of a townhouse in the upscale London neighborhood of Chelsea.

In other ways, Odey is unconventional for someone of his upbringing. His money is largely self-made. He bets on equities at a time when the vogue is for hedge funds investing in credit. He’s critical of Conservative Prime Minister David Cameron’s failure to focus on reviving the U.K. economy.

“We haven’t got any leadership,” he grouses.

Odey’s yo-yo returns of recent years are the result of his contrarian calls. He gambled on a rebound in bank stocks in the U.S. and the U.K. after the pummeling they took during the financial crisis.

‘Biggest Risk’

That call went wrong in 2011, and he was left holding British banking stocks that declined as institutions struggled to cope with the rising cost of borrowing money in the interbank market. One of his biggest holdings was Barclays, which tumbled 33 percent in 2011.

Then, in 2012, bank stocks--his biggest allocation--turned out to be a boon. Along with other U.K. banks bolstered by the European Central Bank’s bond-buying program, Barclays (BARC) surged back 31 percent in 2012 through Dec. 5.

“The biggest risk is not to take a risk, and I don’t think you could say that about Crispin,” says Phil Irvine, co-founder of London-based PiRho Investment Consulting Ltd. “The most damning thing for hedge funds in the last few years is just the complete lack of returns. In some ways, Crispin’s more return-focused approach, as opposed to minimizing volatility, is probably more favored now.”

Odey managed a return of 48 percent from the end of 2007 through the end of October even as hedge funds globally lost more than 8 percent, according to data compiled by Bloomberg.

Lackluster Return

The Vanguard Balanced Index Fund (VBAIX), which tracks a mix of stocks and bonds, rose 7.36 percent during that period. Odey stood out in 2012, when many of Europe’s biggest hedge funds underperformed.

Alan Howard, co-founder of $39 billion hedge fund Brevan Howard Asset Management LLP, posted a lackluster return of 1.8 percent through Nov. 9 for his Master Fund.

Michael Platt, founder of $32 billion firm BlueCrest Capital Management LLP, returned just 4.85 percent through the end of October for his BlueCrest Capital International fund. Brevan Howard and BlueCrest are more risk averse than Odey; neither firm has ever posted an annual loss.

The only manager to beat Odey in Europe in 2012 was CQS U.K. LLP founder Michael Hintze, whose $1.5 billion CQS Directional Opportunities Fund (CQSDIRO) gained 29 percent through October. Hintze, 59, who trades convertible bonds, securitized loans and corporate debt, has been betting that central bank stimulus policies would fuel rising asset prices.

History Buff

Like Odey, Hintze rebounded from a poor 2011, when CQS slid 10.4 percent as investors sold riskier assets because of the sovereign-debt crisis; it was the worst annual loss since Hintze started the fund in 2005.

Odey, a history buff who’s working on a book about John Maynard Keynes’s track record as a money manager, is at heart a traditional stock picker. Driven by the research of his 22 analysts, Odey melds his macro worldview with micro analysis of which companies stand to win or lose.

In 2012, Odey accrued a 5 percent voting share in Man Group (EMG) Plc, the world’s biggest publicly traded hedge-fund manager, overseeing $60 billion. He saw an opportunity as Man Group’s shares sank as much as 50 percent in 2012 while its flagship fund posted losses. Odey says he’s confident the company will rebound.

“They are an amazing selling machine,” Odey says.

Stock Surging

Some of Odey’s other big 2012 investments have paid off. His third biggest equity holding after BSkyB and Barclays is Sky Deutschland AG (SKYD), which almost tripled in value in 2012 by early December, as it moved into profit and secured a long-term deal to broadcast games played in the Bundesliga, Germany’s top soccer league.

That same year, Odey’s wager on retailer Sports Direct International Plc (SPD) turned out to be a winner, with the stock surging 87 percent.

Odey may have drawn lessons in business by watching his father fail at it. Crispin grew up in East Yorkshire at Hotham Hall, a 4,000-acre (1,620-hectare) country estate dating from about 1720. His father, Richard, ran the upscale Barrow, Hepburn & Gale Ltd. leather goods company at a time when the company was struggling.

After leaving Oxford in 1980, Crispin trained as a barrister before pursuing a career in fund management, first at Framlington Group and then at Baring Asset Management.

Wake-Up Call

In 1985, he married Prudence Murdoch, Rupert Murdoch’s eldest daughter. The marriage lasted only a year before they divorced. Having inherited Hotham Hall -- and its heavy debts -- Odey sold it off in the mid-1980s to avert bankruptcy. The experience was a wake-up call.

“That was the moment when you actually had to do something,” he says.

In 1991, Odey married Nichola Pease, a member of one of the founding families behind Barclays. She urged him to set up his own firm that year. Initially, he managed $150 million, including money from two luminaries of the hedge-fund world, George Soros and Paul Tudor Jones, who Odey says were looking for someone to pick European stocks.

His start was wildly successful: The fund had gained 80 percent by the end of 1993.

Then Odey crashed. In 1994, he made a wrong-way bet on interest rates and U.K. bonds, causing his returns to sink 44 percent when the U.S. Federal Reserve (FDTR) unexpectedly doubled interest rates to 6 percent. Investors pulled their money, and his nascent fund went from $1 billion to $50 million.

Storm Clouds

For the next five years, he says, he won only one new client. Even so, his returns bounced back, as assets under management grew from $50 million to $250 million in 1999.

Assets have risen steadily ever since, especially after he discerned storm clouds gathering over the credit markets two years before the financial crisis.

“Current trends are unsustainable,” Odey wrote in the foreword to the 2005 work his firm commissioned from financial historian and journalist Edward Chancellor. “History doesn’t allow us precisely to identify inflection points, but to paraphrase Kant, those ignorant of its lessons are doomed to repeat its mistakes.”

Although Odey confused his philosophers -- the aphorism he referenced is most commonly attributed to George Santayana or Edmund Burke -- his forecasts were correct. Indeed, he was too early.

In 2005 and 2006, he began increasing his short equity positions, a money-losing strategy only balanced out by some long exposure.

Staying Power

As a result, his returns were dull by Odey’s standards. In 2005, he was up 8.2 percent. In 2006, he was up 1.2 percent.

Then along came 2007. “When the crash happened, we started really making money,” Odey says.

His flagship fund returned a whopping 57 percent. As the subprime crisis took off, Odey’s bets against stocks such as HBOS Plc, which as Britain’s biggest mortgage lender slumped 35 percent that year, drove his high returns.

Odey’s staying power is impressive in a universe that has seen some of its stars fall to earth. Witness Greg Coffey, co-chief investment officer of Moore Capital Management LLC’s European business, who retired in October, and Pierre-Henri Flamand, who, having once run the biggest proprietary trading desk at Goldman Sachs Group Inc., closed his two-year-old Edoma Partners LLP in November.

“I slightly feel that I was there before them and I will be there after them,” Odey says.

‘Crappy’ Investor

Odey can be dismissive of those who are slow to subscribe to his views.

Back in early 2007, Cameron Chartouni, chief executive officer at London-based Acropolis Capital Partners Ltd., a family office that invests in hedge funds, visited Odey to discuss the possibility of putting money in his fund.

Odey says he told him he was about to make a lot of money (which Odey did). Chartouni held back. Before deciding whether to invest, Chartouni says, he wanted to get to know Odey’s trading strategy better.

Chartouni met Odey again a year later. When Chartouni started asking about risk management, Odey told him he was just another “crappy” investor and claimed to find risk management “boring,” Chartouni says.

Their tense exchange carried over into e-mail the following day, with Odey concluding the message chain by calling Chartouni a “jerk.”

“It was the height of arrogance,” Chartouni says. “I would never dream of treating someone like that.”

‘So Pleased’

When asked about the incident, Odey says of Chartouni: “His job is to find funds that were about to make money. I thought he would come in and say: ‘What was I thinking last year?’ Instead, the only question he asked is, ‘What is your risk control?’”

Odey feels no remorse for his sharp treatment of Chartouni. “I was so pleased to have annoyed him,” he says.

Only a hedge-fund maverick with a pretty stellar track record would dare to speak to a potential client that way, putting his mouth where his money is.

To contact the reporters on this story: Stephanie Baker in London at stebaker@bloomberg.net Jesse Westbrook in London at jwestbrook1@bloomberg.net

To contact the editor responsible for this story: Stryker McGuire in London at smcguire@bloomberg.net.


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