Will Kyle Bass’ Bearish Bets on China Pay Off?

Kyle Bass is a known hedge fund manager. And he often sparks controversies. For example, he shorted shares of pharmaceutical companies and then sued them for patent infringements, hoping for declines. He also blamed victims of GM car crashes while being a GM shareholder. But, he’s also known for predicting the subprime mortgage crisis and resulting major recession back in 2008.

Now, Bass is betting on a big downturn in China. He doesn’t think that economic problems in the Middle Kingdom are far from over. He made bullish bets on the U.S. Dollar and bearish bets on several Asian currencies. Meanwhile, his fund, Hayman Capital Management, liquidated some positions in equities, bonds, and commodities.

“About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years,” claims the Wall Street Journal.

To make his bet on decline in China even bigger, Bass borrowed money on margin. Essentially, he bets that the American Dollar will rise, while Asian currencies fall.

So far, in 2016 Bass’s fund hasn’t performed well. But, his investments are long term. Meanwhile, there are signs of weakness coming from China, the world’s second economy. Several bond issuers have defaulted this year alone, and it looks like it’s getting worse. Recently, nearly 190 of Chinese companies decided not to issue new debt, at least not for now.

Still, Kyle Bass doesn’t think there will be a massive collapse in China similar to the one in the United States several years ago. In fact, he expects Chinese to recapitalize their banks. Nevertheless, he has made bearish bets. And to make profits, there’s no need for massive declines. After all, his bets are leveraged. At the same time, this makes these investments risky if China performs well instead of declining.

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