(Bloomberg) -- Kyle Bass is going for broke on a currency trade that has burned bearish speculators for more than three decades. Kyle Bass, the often-bearish hedge-fund manager who won big during the global financial crisis, has trained his sights anew on the Hong Kong dollar.
The MSCI Hong Kong Index rose 0.5% at 10:29 a.m. local time, set for its highest close since July.A gauge of the city’s financial stocks is trading near an all-time high after outpacing gains in the broader market this year and posting an advance of nearly 1% on Thursday. Another flareup in protest violence could easily snuff out recent gains in the local stock market.Howard Lee, a deputy chief executive at the Hong Kong Monetary Authority, wrote in a blog late last month that the city’s financial markets are stable, supported by a “well-tested” currency peg and “robust” banking sector. The de facto central bank has not seen any significant fund outflows since the protests began, he said. While interbank borrowing rates have increased over the past 12 months, they remain far below levels that preceded previous crises. But they’re now the minority.Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two-and-twenty” fee model that’s been a fixture for decades if they want to expand. 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. Kyle Bass, Hayman Capital Management founder and chief investment officer, says Hong Kong is poised to experience a “full-fledged banking crisis” this year. It’s survival.Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. Few seem to be listening.This week’s phase one trade deal between the U.S. and China may help bolster investor sentiment toward Hong Kong -- a key gateway for trade and financial flows into Asia’s largest economy. Hong Kong dollar deposits were little changed at HK$6.9 trillion ($888 billion) in November from a month earlier, according to official data.“Yes we are in a recession, but living in Hong Kong you can see that property prices, the stock market, they’re still doing relatively well,” said Kenny Wen, a strategist at Everbright Sun Hung Kai Co. in Hong Kong.
In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world.
If Hong Kong’s economy continues to weaken and the city’s sky-high real estate prices tumble, banks could face a surge in soured loans. The Hong Kong dollar, which Bass is betting against, has recently appreciated toward the strong end of its trading band against the U.S. currency.Of course, Bass’s predictions about subprime mortgages in 2007 ultimately proved prescient, even as many investors shrugged them off at the time.
In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world.