Last February, when Kyle Bass announced the upcoming launch of a dedicated fund to short the Yuan, as part of a bigger macro short unveiled in his report on “The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance”, many were skeptical if not outright mocked the Hayman Capital founder.
One year later, it is those who invested alongside Bass that are laughing, because as Bass writes in his latest letter to investors, "I am pleased to share that the Hayman Capital Master Fund, LP's estimated net performance for the calendar year of 2016 was +24.83%", or double the S&P's return including dividends. Putting this return in a longer context, those who have invested with Hayman since the fund's inception in 2006, this represents an inception-to-date return of +436.75% and an annualized return of +16.70%.
So where is Bass now? As he unveiled in his letter, he is sticking with Asia, which he will cover with a brand new Asia-focused fund, his third, "designed to provide investors with nuanced access to perhaps one of the largest imbalances in financial markets history."
Bass explains the reason for his shift back to macro investing, which began 2016, as follows: "we reorganized our portfolio to invest in the macro themes that began to reveal themselves early in the year. Exploiting our reflationary view, we invested in global interest rate markets, currencies, and commodities across the world."
As the above returns confirm, Bass was clearly successful last year and is why he plans to continue doing more of the same in the current year:
As we enter 2017, we believe enormous macro imbalances are just beginning to unwind. As central bank monetary policies have become impotent, these imbalances will likely continue to unfold in what we believe to be a much more predictable manner. Over the past several years, economic gravity has been pulling one way and central banks have been using aggressive monetary policy to pull the other. Investing in macro, while this phenomenon has existed, has been difficult to say the least. From here- on, we expect to encounter significant changes in global fiscal policies along with a continuation of the upward movement of general price levels for consumers and producers alike. This type of environment plays into our strengths at Hayman.
Bass believes that government policy changes "will likely act as accelerants to the underlying imbalances which have been accumulating for the past eight years (and in some cases, the last three decades), which is a polite way of saying a mean reversion to a state prior to the unprecedented central bank intervention over the past 7 years."
In terms of his outlook, Bass notes that "Unlike establishment prognosticators, we hold a nuanced view of the world that contemplates higher global inflation, tepid real economic growth, and severe imbalances in select Asian financial systems and currency markets."
In other words, it's all about Asia, again.
And it is likely Asia which he envisions when as he further writes, "global markets are at the beginning of a tectonic shift from deflationary expectations to reflationary expectations."
Bass then gives his investors a rhetorical question: "What happens to economies at maximum leverage when interest rates begin to rise?"
Just guessing here but, either bad things, or the central banks reengage to prevent even a modest, 10% selloff?
Whatever the right answer, Bass says that "reconciling the potent strengths of the world’s largest economies with their inherent weaknesses has revealed various investable anomalies. The enormity of the apparent disequilibrium is breathtaking, making today a tremendous time to invest. Over the past 18 months, we have focused on a particular set of asymmetries, which we are now seeking to exploit."
However, what we found most notable about Bass' relatively short letter is the following admissions:
One opportunity in particular has the greatest risk-reward profile we have ever encountered in our decade of being a fiduciary. As investors of ours, you are positioned to take advantage of one of the world’s greatest macro imbalances.
He did not disclose what the opportunity was, but left readers on the following optimistic note: "We expect the next few years to be the best years for macro investing since the late 1990s."