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.
According to Bloomberg News, Bass 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.
His fund, however, will return outsized gains if his call for the demise of the peg, a prediction that has caught investors like George Soros on the wrong side in the past, comes to fruition.
Bass told investors that the fund could see a 64-fold return if the currency drops by 40%, Bloomberg News reported, citing a person familiar with the matter. 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.
Bass, who has been shorting the currency for more than a year, has said he expects a “full-fledged banking crisis” in Hong Kong by the end of this year, due to high levels of financial leverage along the lines of those seen prior to implosions of the banking systems in Iceland and Ireland.
President Donald Trump last month said that his administration would begin to revoke Hong Kong’s special status, in an escalation of tension with China.
Hong Kong is currently exempt from tariffs levied on Chinese imports, and the Hong Kong dollar US:USDHKD is freely exchangeable for U.S. dollars US:DXY.
Trump’s move to pull the special status followed an announcement from U.S. Secretary of State Mike Pompeo “that Hong Kong is no longer autonomous from China, given facts on the ground” under the Hong Kong Human Rights and Democracy Act of 2019.
Bass, who began warning the peg was at risk more than a year ago, is starting his fund during a period of extreme economic and political turbulence in Hong Kong.
Anti-government protests and the coronavirus pandemic have plunged the financial hub into its worst recession on record, while China’s decision last month to impose a controversial national security law has stoked fears of capital flight and potentially damaging U.S. sanctions.
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.
Article originally posted at market watch.