market folly

Hat tip to the PragCap for posting this gem up. Kyle Bass, Managing Partner at Dallas based hedge fund Hayman Advisors LP has sent out his latest investor letter and as always, it is another long (23 pages) and detailed piece that provides macro insight. This is Bass' first letter since almost 6 months ago when he wrote his March letter equally full of juicy thought. When last we checked in on Hayman's performance, they were up over 340% since inception. Regretfully, we don't have anymore up-to-date information but we'll certainly pass it along if we receive it. Bass & Hayman are also well known for predicting the subprime crisis along with fellow hedge fund Paulson & Co. As we've followed Bass, we've noted his decisively bearish stance on the economy as a whole as he has even gone as far to predict sovereign defaults, something he again touches on in this letter below.

This time around, Bass summarizes his stance by cementing the following viewpoints. He thinks inflation will take its toll, or as he calls it, "currency debasement." He notes that inflation typically takes 1.5 years to come to roost but he feels it will arrive quicker than normal due to the severity of the stimulus that has been necessary to prop up the economies of the world. Obviously, he is also not bullish on the macro environment in general. In fact, he is downright bearish, particularly on the US consumer. And, as the US consumer goes, often goes the US economy.

Based on his stance, he has positioned Hayman's portfolio as follows. He has invested in credit but takes a cautious stance, investing in mortgage backed securities that are very high in the capital structure. About 50% of their assets under management are now in mortgage positions, which shows you his conviction here. He likes mortgages that have short average lives and have nice risk adjusted yields. He writes, "Our underwriting standards take into consideration a range of macro variables including further home price depreciation, maintained stress on consumer balance sheets and a prolonged downturn in the labor market." Hayman, named after the island where Bass honeymooned, also now has corporate credit positions in the form of bank loans and high-yield bonds to the tune of 25% of assets now. Interestingly enough, we also see that Hayman has allocated part of their portfolio to precious metals and they are also evaluating other natural resource plays. Lastly, Bass also believes that rates will start to head higher over the next 1.5-2 years and that Japan has the "best convexity for rates."

Embedded below is the October letter from Kyle Bass & hedge fund Hayman Advisors (or download the .pdf here):




Kyle Bass attended Texas Christian University (TCU) in Fort Worth, TX and now runs his firm Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. He eventually turned $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and he has also in the past headed an office of Legg Mason. His first major prediction was centered around leverage. We'll have to see if his second leverage-based prediction plays out.

If you still aren't negative on the economy and/or markets yet after reading the above letter, then sampling a bit of Hayman's March letter might very well make you reconsider your opinion, at the very least. It's definitely thought provoking stuff and is highly recommended as well.