Bass is launching a new fund with leverage by 200 times to bet against Hong Kong’s currency

10 Jun, 2020 13:35
source: Singularity Financial

Singularity Financial Hong Kong June 10, 2020 – The Dallas-based founder of Hayman Capital Management is starting a new fund that will make all-or-nothing wagers on a collapse in Hong Kong’s currency peg, people with knowledge of the matter said.

A year ago, Hayman Capital Management’s Kyle Bass wrote about “the quiet panic in Hong Kong” and warned of an “impending crisis” in the region. Now, amid mounting unrest, he’s putting his clients’ money — and then some — on a bet that the local currency will collapse.

Kyle Bass, best known for his prescient bet against subprime mortgages before the 2008 financial crisis, is launching a new fund that will use option contracts to leverage the assets by 200 times in an “audacious” all-or-nothing position that will lose investors all their money if Hong Kong’s currency is still pegged to the U.S. dollar after 18 months, according to Bloomberg News.

The hedge fund manager who’s has increasingly focused on Hong Kong since last year as an extradition bill stoked tension over the pursuit of democracy and relationship with China, said the former British colony faces a banking crisis in 2020, mirroring the struggles of Iceland and Ireland a decade ago. He has been shorting the currency for more than a year.

“It takes about a year for a full-fledged banking crisis to hit, and you’ll see a full-fledged banking crisis in Hong Kong now,” Bass, founder of Hayman Capital, said on Bloomberg TV January this year.

Bass told prospective investors that the Hayman Hong Kong Opportunities Fund, LP-Prodigious Series was due to launch on June 1 and could see a 64-fold return if the currency declines by 40%, according to a person familiar with the matter, who asked not to be identified because it’s private.

Options data included in the story shows that markets are pricing in a 6% chance the currency will break 7.90 in 12 months, outside the weak end of its 7.75-to-7.85 trading band against the U.S. dollar.

It’s unclear how much money he’s raised for the strategy, which is an offshoot of an existing fund focused on Hong Kong. Bass declined to comment.

By taking aim at the city’s currency, Bass is betting he can time the demise of a dollar peg that has survived repeated speculative attacks since 1983 and wrongfooted big-name investors including George Soros.

Hong Kong Financial Secretary Paul Chan said this month that the city is ready to defend the exchange rate and that mainland China could provide U.S. dollars through a currency swap line should Washington impose sanctions.

Meanwhile, the Hong Kong Monetary Authority has said it doesn’t see evidence of capital outflows. Local deposits climbed in April, while Hong Kong home prices have slipped just 5% from record highs in 2019. The city’s stock market has rallied along with global shares since March. Hong Kong has about $440 billion of foreign-exchange reserves, more than two times the city’s money in circulation, according to the HKMA.