Bass's Hayman to launch QIF managed account version of flagship

Dallas-based Hayman Capital Management, the $1.1bn asset manager whose founder Kyle Bass made $500m during the 2007 US subprime collapse, is to launch an Ireland-domiciled managed account of its flagship hedge fund strategy, HFMWeek has learned.
According to a source familiar with the plans, the offering will become part of an Irish Qualified Investor Fund (QIF) in a separately managed account structure, giving Hayman's maiden strategy, Hayman Advisors, greater exposure to non-US investors.
The move comes as QIFs experienced high asset growth in recent years. In a report from last year, HFMWeek revealed that total assets of QIFs in 2010 grew by 35% to €153bn according to figures released from the Central Bank of Ireland.
QIFs, a type of regulated investment fund vehicle, can be authorised by the Central Bank within 24 hours of receipt of completed documentation. To be eligible as a QIF, a fund must have a minimum initial subscription of €100,000 per investor.
Additional details were not available. A Hayman spokesperson declined to comment.
Last month, reports revealed that Hayman Capital launched a structured products vehicle focused on RMBS opportunities.     

Is Kyle Bass Wrong on the Japan Trade?

Kyle Bass may be one of the best-known hedge-fund investors in the world. His bets against subprime made him wealthy, and as close as you can come to being a celebrity while managing a hedge fund.

These days, he is probably best known for his prediction that Japan is headed for a “bond crisis.”

The principle rationale for his thesis is demographic. Japan has an aging population with more people leaving the work force than entering. He predicts that soon they will have more people dis-saving than saving and begin accumulating a trade deficit with the rest of the world, breaking “the funding mechanism” that has supported low interest rates in Japan for decades.

“Their ability to fund themselves internally is coming to an end,” Bass wrote to investors in a letter last November.

This narrative of a country needing internal, private savings to fund its government spending and public-sector debt accumulation is familiar to a lot of people and has the ring of truth.

If the government cannot keep borrowing from its people, won’t it have to borrow from outsiders? When the country starts paying out more to the rest of the world than it takes in, doesn’t it become dependent on the credit of the rest of the world? And what if outsiders won't tolerate lending at near zero-rates against a public sector balance sheet with a “debt burden” as high as Japan’s? 

That’s certainly the way it would work for a household. As revenues contract, the ability of a household to “fund” itself contracts as well. An aging household—that is, one in which grandpa and grandma retire—had better have some savings. If they are dependent on credit, they will soon find themselves paying exorbitant interest rates.

Sure, they could do a reverse mortgage, but eventually that too will run dry. When they run out of equity to mortgage, bankruptcy will loom.

Joe Weisenthal at Business Insider thinks that this resemblance is an illusion. Japan, he argues, is not going bust. Bass’ logic is “badly flawed,” he writes. As a result, the Japanese trade is “never going to pay off for him.”

Weisenthal makes a number of points in his argument. First of all, he says that the dependence of foreign creditors is an irrelevancy.

“There's no connection between rate sustainability and domestic/foreign borrowing,” Wesienthal writes.

The reason why is fascinating, because in order to get your mind around it you have to understand that for Japan, government debt accumulation is nothing like debt accumulation by private households, municipalities, corporations or even European governments. You have to step through the looking glass and apply Alice-in-Government-Land logic.

Weisenthal explains:

Foreign ownership of debt is not a function of the country going cap in hand all around the world, looking for investors to buy their bonds. It's a function of trade. When a country runs a trade deficit, it basically means it's spending more on goods from the rest of the world than the rest of the world is spending on goods from said country.

So it stands to reason that if Japan is buying a lot from the rest of the world, then there are a lot of yen floating around the world: More yen wind up in places like China, the Mideast, the US, Europe, etc.

What happens to those yen? Well, some will get spent on other things, but in the end, they'll all wind up in bank accounts somewhere, and somehow they'll find their way into a Japanese Government Bond, so that the holder of said yen might get some yield. Now theoretically if someone had a bunch of yen, they might prefer to buy German bonds or US bonds, and that's fine, but then there's another private holder of yen who has to make a decision about where they're going to place their currency. Eventually, that currency will find its way home, and the cycle is complete.

But if Japan doesn’t have to worry that high levels of debt will drive interest rates higher, what is going on in Europe?

The very question points toward its own answer. Japan has much higher levels of debt compared to its GDP than any European country. If that metric were what mattered, Japan would already be in a debt crisis.

Indeed, it would have preceded Greece into default and political mayhem. Greece, Italy, Spain, Ireland and Portugal all have more attractive “balance sheets” on this measure.

So obviously, something else is going on. Part of the answer is the currency union. As Weisenthal explains, Japan’s excess spending inevitably winds up as yen-denominated savings in Japanese government bonds. But when the government of Spain deficit-spends, there’s no guarantee that the euros wind up being used to buy Spanish government bonds. In fact, right now, much of the deficit funds of countries like Spain and Greece are being used to buy German bonds.

“This is the key idea that Bass is missing, and why his trade is never going to pay off. For a country that borrows in its own currency, government spending finances borrowing! If Japan spends 100 billion yen on something, that's 100 billion yen out there in the world that will eventually wind up in a financial institution, where ultimately 100 billion yen worth of JGB will be purchased,” Weisenthal writes.

In other words, Bass has the “funding mechanism” that supports Japanese government bonds backwards.

I’d argue that Weisenthal potentially misses one possible source of a crisis—a loss in global demand for yen.

For a country like Japan, there is no risk at all of interest rates rising—except in accordance with public policy. So long as the Bank of Japan desires rates to stay low, they will stay low. Even if all the foreigners with excess yen holdings decided to bury their yen in the ground, rates would stay low because Japan’s central bank can support rates at whatever level it wishes by simply buying the bonds at the target rate.

Kyle Bass More Than Triples Investment in Tech to 46 Percent of Portfolio

Last quarter, Kyle Bass had 18 percent of his portfolio weighted in tech stocks. In the first quarter, that changed to 46 percent. The shift continues his trend of making large bets on a certain sector each quarter. In the third quarter of 2011 he was 46 percent in oil & gas, and in the fourth he was 55 percent in financials. An overview of Kyle Bass’ career and investment approach is here.
His top three new tech buys in the first quarter were: Alcatel Ads (ALU), MEMC Electronic Materials Inc. (WFR) and Tellabs Inc. (TLAB).
Bass bought 14,909,555 shares of Alcatel Ads (ALU) in the first quarter at an average price of $2.14, making it his largest holding at 23.6 percent of his portfolio. It is currently at $1.62 per share, near its 52-week low of $1.39 per share.
Alcatel builds next generation networks, delivering integrated end-to-end voice and data communications solutions to established and new carriers, as well as enterprises and consumers worldwide.
Alcatel Ads has a market cap of $3.9 billion; its shares were traded at around $1.63 with a P/E ratio of 5.1 and P/S ratio of 0.2.
Alcatel stock has plunged 71.3 percent over the last year. In the first quarter of 2012, Alcatel’s revenue dropped 12.3 percent year over year to $4.2 billion. Revenue fell 18% in its Networks segment, 25 percent in its Optics division, 29.5 percent in its Wireless division and 8.7 percent in the Wirelins division. Revenues for its IP division increased 23.5 percent with particular strength in the APAC and Americas regions, which both grew more than 30 percent year over year. Service providers in these areas are in the process of transforming their networks to all-IP. Sales of its next-generations Networks also increased 23 percent.
Bass bought 3,588,952 shares of MEMC Electronic Materials Inc. (WFR) at an average price of $4.35.

MEMC Electronic Materials Inc. is a global producer of polysilicon and silicon wafers. MEMC Electronic Materials Inc. has a market cap of $368.1 million; its shares were traded at around $1.7 with and P/S ratio of 0.1.
MEMC Electronic Materials stock has declined 83 percent in the last yearas it struggled with a challenging environment in both the semiconductor and solar markets. In May, Standard & Poor’s downgraded the company’s debt to junk status.
“The downgrade reflects our view that while the restructuring announced in December 2011 may deliver longer-run benefits to the company, cash flow will be negative in the first half of 2012 as the company works through the cash costs of shuttering its vulnerable solar materials business,” S&P said in a statement. “There is uncertainty as to whether solar panel installations and sale prices will support a stabilization of cash flows in a solar market that remains very challenging.”
The same day, MEMC acknowledged S&P’s action, saying in a statement: “”We are disappointed with the rating change by S&P,” commented Brian Wuebbels, MEMC’s Chief Financial Officer, “but we are comfortable that our cash and liquidity position is sufficient to meet our current cash needs. The credit downgrade by S&P today will not adversely affect our current access to our existing non-recourse construction revolver for SunEdison construction activities.”
MEMC’s revenue increased from $1.2 billion in 2009 to $2.7 billion in 2011, but the company suffered a loss of $1.5 billion in the fourth quarter of 2011 due to restructuring, impairments and other charges. Net loss for the first quarter of 2012 improved to $92 billion. Revenue in its Solar Energy segment declined 37 percent year over year to $303.2 million as the company moved away from selling solar wafers.

Kyle Bass Buys Alcatel, Monster, Yahoo, Tellabs, Sells MGIC

Kyle Bass , the founder of hedge fund Hayman Advisors, has been very bearish and sold almost all of his long positions at the end of 2011. His views must have changed lately as he bought into many new positions. It is interesting that he bought a lot of technology stocks such as telecom equipment maker Alcatel and Tellabs, online job site Monster and the most storied Yahoo! Etc.

As of 03/31/2012, Hayman Advisors owns 13 stocks with a total value of $143 million. These are the details of the buys and sells.

Kyle Bass’ Japan Macro Fund Down 29% for April

Kyle Bass is the founder of Hayman Capital. He is famous now for buying Greek Sovereign Credit Default swaps at $1,000 for $1 million of the price. He Supposedly made a 650x return for each swap which he bought. He was also early in the subprime game and shorted that successfully, as well.
Bass is a known bear. He owns physical gold and even has a sheltered stocked up and ready for doomsday.
Bass has been in the media recently for his bearish views on Japan. We have disagreed strongly as noted here.
Bass compared Japan’s method of financing its debt to the massive ponzi scheme by Bernie Madoff in a recent interview stating:
“You can make promises for a long time as long as you don`t have to live up to them.”
“Japan is in the crosshairs of the market… I`ve never seen more mispriced optionality in my entire life.”
He has purchased Credit default swaps and shorted Japanese Government bonds, according to statements and people familiar with the matter.
So far the trade has been going in the opposite direction. According to our source, Bass’ Macro Opportunities Master Fund is down 32% in April alone.
January performance was -8%, February 7% and March 2%, and year to date -29%.
Since inception in July, 2010 the fund is down 61%.
We were unable to confirm assets under management or percentages of each security in the fund.
The Japan trade has not played out yet, but Bass made the above comments only several days ago. He clearly thinks that eventually he will be proven correct.