Ten years after the financial crisis that minted his reputation, Hayman Capital Management founder Kyle Bass has yet to match – or even come anywhere close to – the success he had during the depths of the crisis, when his tiny $33 million fund’s bets against subprime mortgages more than doubled its AUM in a matter of months.
His performance in recent years has been mixed, and last year was his worst since the fund’s launch in 2006. His Dallas-based fund was off 19%, largely thanks to Bass’s longstanding bet against the Chinese yuan, which strengthened as the US dollar weakened, the Wall Street Journal.
All of this happened as hedge funds notched their best returns in years.
As Bass explained late last year, he doesn’t regret his bet against the yuan (despite all the pain it has caused him). He merely regrets opening the position when he did.
Previously, Bass described his yuan short as “the greatest investment opportunity right now” adding that betting on a steep devaluation of the yuan was the best way to profit off the Chinese economy’s inevitable “hard landing.”
The crux of his investment thesis hasn’t changed materially since it first appeared in these pages two years ago.
Put simply: China has an enormous debt problem and the rapidly decelerating economy means that the country’s banks will only be able to paper over the soaring NPLs for so long.
If Beijing wants to eliminate the acute overcapacity problem that’s contributed mightily to the global deflationary supply glut, it will mean allowing the market to purge misallocated capital. And that means bankruptcies and a wave of defaults.
“The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that US home prices would never decline,” Bass begins.
China, Bass believes, won’t be able to contain the fallout from this crash without substantially devaluing its currency. Since its banking sector doesn’t have enough capital in reserve, it will need to print money on a massive scale to plug the holes. Bass has said the currency could fall as much as 30% to 40%.
Despite the relative insignificance of Bass’s bearish bet against the flood of capital cycling into and out of China every day, Chinese newspapers have printed editorials condemning Bass and George Soros, another speculator betting against the yuan.
To China, Bass is a “foreign meddler” who is colluding to destabilize the country’s economy and financial markets.
He compared his bet against the yuan to his iconic bet against the US housing market.
“All these things were pointing to such crazy and wretched excess that it was bound to blow up,” Mr. Bass told WSJ.
“The question was, when was it going to break, and what was going to break it.”
Bass, a former Bear Stearns executive, is also remembered for his role in triggering the most acute phase of the crisis. According to documents released recently by the National Archives, Bass was CNBC’s source for a report saying Goldman Sachs had declined to trade with Bear. That report triggered the bank run that many believe pushed Bear into insolvency. It was swiftly bought by JP Morgan for $2 a share.
Bass didn’t confirm or deny this – but did say it was in his interest for Bear to stay alive, and that he warned the firm about its subprime exposure in 2006.
“There are those out there who want to shoot the messenger…but I had every reason for Bear Stearns to stay alive,” he said.
Other Hayman Capital plays have netted the firms a tidy profit, including bets on Greek debt and the Japanese yen. Meanwhile, bets on an oil price recovery proved premature.
The fund is still focused on China, but Bass said he has recently invested more energy in another focus: His bullish take on Southern Europe.
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