Hedge fund managers bet a lot of money because they can. They use other investors’ money and gamble that their assessment of a situation or a change of events is the right one. Kyle Bass, the Dallas-based hedge fund manager, earned his reputation by betting against the house and winning big in 2008. Bass knew enough about the subprime mortgage industry to know it was a house of cards with no foundation. His small investment company, Hayman Capital, was the talk of the investment industry in 2008, but that talk has changed over the last eight years. Bass is on a mission to get his investment mojo back. Bass has placed a large bet against the Chinese yuan. Betting against the Chinese doesn’t sound like a good idea, but once again, Bass believes he has enough information to turn that bet into a fortune for his investors and himself.
Kyle Bass believes that China’s banking system is in serious trouble because of the bad debt on their books. Chinese banks have been generously granting loans for real estate and retail ventures, and many of those loans can’t be paid back for one reason or another. The banks are sitting on billions of dollars in bad debt, and Bass thinks the Chinese government will have to bail the banks out using a sizable chunk of their massive capital reserves. If that happens, the yuan will lose value against the U.S. dollar and the German mark, and Bass will win billions of dollars. But the Chinese say Bass is wasting his money. They plan to control the value of their currency over the next three years.
Bass has been wrong before. He was wrong when he backed Argentina when the country defaulted on bonds held by other hedge funds. And he was wrong when he backed General Motors when they put faulty steering mechanisms and airbags in some of their automobiles. He is wrong now by betting against drug companies using the information he is receiving from Erich Spangenberg, a famous patent troll. If he is wrong about the Chinese yuan, Bass, and his hedge fund may be licking their wounds for years.