Hedge-Fund Star Kyle Bass Slips on Oil
Collapse in energy prices hits Bass’s Hayman Capital Management; firm’s main fund is down about 7% this year
Hedge-fund manager Kyle Bass made a killing when the mortgage bubble popped. He wasn’t as lucky with the oil bust.
Reassured in part by a March 2015 meeting with energy investor T. Boone Pickens, who said the glut of crude wasn’t going to overwhelm the country’s ability to store it, Mr. Bass began buying shares of oil producers like Concho Resources Inc. and Whiting Petroleum Corp. It was a big mistake. Energy prices collapsed anew, extending what has become Mr. Bass’s worst streak since he launched Hayman Capital Management LP a decade ago.
So far in 2016, Hayman’s main fund is down about 7%, according to investors, well short of the 1.3% gain for the S&P 500, including dividends—putting the fund on track for its third straight year of losses.
“Everyone has terrible periods,” Mr. Bass said in an interview, acknowledging he bought into an energy rebound too soon. “I had no idea crude would fall so low.”
A representative for Mr. Pickens, referring to the meeting with Mr. Bass, said: “We pushed back on his full storage concerns and were right on that. What investment decisions Kyle made after that meeting and other research he conducted we don’t know.”
Mr. Bass’s penchant for publicly adopting big, contrarian positions has made him one of Wall Street’s most scrutinized investors. Though he followed his successful mortgage wager with winning moves against Greek debt and the Japanese yen, Mr. Bass’s recent losses—and a shift by hedge-fund investors to become more skeptical about hedge funds—raise the stakes for Mr. Bass. He has placed a big, new wager against China’s currency, a trade that looked good at first, but has suffered as China’s markets stabilized.
Mr. Bass’s firm now manages about $770 million, according to people close to the matter, down from $2.3 billion at the end of 2014. Mr. Bass moved to return more than $1 billion to investors last year after scoring profits on a bet against Japan, but he has also had some investor withdrawals, according to people close to the matter.
“It’s easy to maintain conviction,” Mr. Bass told a hedge-fund conference in Las Vegas this month. “It’s harder to maintain investors.”
Hayman’s long-term record remains strong. Since Mr. Bass launched Hayman a decade ago, his main fund is up 285% after fees, according to an investor, compared with the S&P 500’s 99% gain, including dividends.
At times, Mr. Bass’s investors have profited even when his predictions didn’t pan out. Mr. Bass’s big bet that Japanese interest rates would soar now looks like folly. The country’s central bank adopted negative interest rates early this year, and the 10-year Japanese government bond yielded minus-0.10% Monday.
But the bulk of his trade was predicated on a weakening Japanese yen, and Hayman exited the bearish yen trade before the currency strengthened, so most of his investors profited, clients say.
Hayman has outperformed the market over the past decade while at the same time providing protection through its bearish investments, said Wil VanLoh, a Houston private-equity founder who personally invests with Hayman.
“But returns are going to be lumpy,” he said. “You will have several down years followed by an exceptional up year.”
Hayman has 22 employees, down from 32 last year. Some investors have voiced concern to Mr. Bass that his firm is based in Dallas, while Mr. Bass now spends about half his time in San Francisco.
Mr. Bass says he remains fully involved in his firm and needs fewer employees because he has pulled back from other trading to concentrate on “macro” investing in global markets.
“I’m up at two or three in the morning, checking on Asian markets—the focus on the business has never been lost,” he said.
Recently, Mr. Bass has been shorting Asian currencies, including the Chinese yuan and the Hong Kong dollar. About 85% of Hayman Capital’s portfolio is invested in trades expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years. The firm is launching a dedicated fund to make these trades.
Early this year, Hayman’s main fund was up 5.5% as Chinese markets crumbled. But when the Chinese government bought enough yuan to stabilize markets, his fund suffered.
Mr. Bass anticipates a drop of as much as 40% in the yuan, as China’s debt-laden banking system forces the government to inject trillions of dollars in yuan to recapitalize banks.
Investors say the trade, structured with derivatives, will cost Hayman about 5% a year if the currencies hold steady or gain in value, but will generate annual gains of more than 50% if they fall more than 10%.
Skeptics note China maintains the largest holdings of foreign reserves in the world at $3.3 trillion and that its markets have stabilized.
The Chinese currency “is undoubtedly overvalued and will decline in value over time,” said Michael Lewitt, a hedge-fund manager and newsletter writer. “But as tempting and exciting as it is to imagine a Chinese collapse, it simply isn’t going to happen quickly.”
Mr. Bass believes otherwise, contending that China should be facing problems that will allow the fund to profit within 18 months. Meanwhile, the yuan has weakened versus the dollar in recent days.
“No country has ever grown its banking system as quickly and recklessly,” Mr. Bass says, adding that his performance will “be redefined over the next two years.”