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Kyle Bass Slashes Portfolio to Short the Yuan

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Kyle Bass of Hayman Capital, widely known for betting against subprime mortgages and earning hundreds of millions of dollars from that bet, is making another bold prediction, this time about the world’s second-largest economy. According to a recent article posted by Business Insider, the successful hedge fund manager sent a letter to his investors earlier this month titled “The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance”, saying that “the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency”. Most importantly, the investor warns that this outcome will most likely impact all countries and markets around the world. “In other words, what happens in China will not stay in China”, said the founder of Dallas-based Hayman Capital. Mr. Bass also pinpointed some similarities between the Chinese banking system of today and the U.S banking system before the recent financial crisis, which include excessive leverage, regulatory arbitrage, and irresponsible risk-taking. It is important to note that Hayman Capital has devoted most of its assets under management to shorting the Chinese Yuan, which led the hedge fund firm to sell out of the majority of its equity positions during the fourth quarter of 2015. The hedge fund sold out of 11 positions while not adding any new positions or even increasing its stake in its few remaining positions during the final quarter of 2015, leaving only two equity positions untouched. Having said that, the following article will discuss the only two equity positions owned by Hayman Capital on December 31, as well as discuss its most noteworthy selloffs during the quarter.

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Kyle Bass
Kyle Bass
Hayman Advisors

Money manager Kyle Bass owns 7.37 million shares of NMI Holdings Inc. (NASDAQ:NMIH) as of the end of the fourth quarter of 2015, worth $49.91 million. There should be a particular reason as for why the hedge fund manager decided to keep his position in the provider of private mortgage guaranty insurance, so let’s attempt to find out what that reason might be. The mortgage insurer was backed by Kyle Bass, Carlyle Group LP and BlueMountain Capital Management LLC when filing an initial public offering in 2013, so it is no surprise that the hedge fund manager decided to hold onto his investment in the company. NMI Holdings Inc. (NASDAQ:NMIH) reported net premiums written of $114.2 million and premiums earned of $45.5 million for 2015, a large increase from the net premiums written of $34.0 million and premiums earned of $13.4 million for 2014. The shares of the mortgage guarantor are down by 31% over the past 12 months nonetheless, and trade at a forward P/E ratio of just 7.70, which is far below the average ratio of 11.60 for the Financials sector. Howard Marks’ Oaktree Capital Management upped its stake in NMI Holdings Inc. (NASDAQ:NMIH) by 4% during the December quarter, to 5.67 million shares.

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