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Interview with Kyle Bass – Hayman Capital

Real Vision VOD – a new on-demand video channel for the finance world just sat down for almost an hour with Hayman Capital’s Kyle Bass.

You can watch the interview:  Here

Our notes from the interview are below:

  • Background
    • Normal middle class upbringing
    • Thought he was going to be a doctor
    • Took an options and futures class. Finished textbook in 1 week, and had highest grade in class and changed his major
    • Finished with a major in real estate finance
    • Read a lot of Tony Robbins and Norman Vincent Peale – and wanted to interview with Wall Street firms
    • Prudential was the only one to give him a call back
    • Spent 1.5 years there – went through global training program
    • Figured out that Bear Sterns was more entrepreneurial and moved on to Bear
    • 1995 at Bear – event-driven hedge funds on investment strategies
    • Took 2,500 dollars and went to MAR hedge fund conference
    • Bear was really entrepreneurial – if no one was covering a fund – you could chase after it
    • Goal all along was to run his own fund – was at bear 6.5 years.  he was largest biggest unit at bear inside of coverage
    • Legg Mason wanted him to start their tx operation
    • They signed a 5 year contract w/ Kyle.  And he said at 5 year and 1 day – he will open his own firm
    • Launched Hayman in Feb of 2006
    • When he launched Hayman – and he kept things really broad – wanted to be global, event driven
    • Right now, public balance sheets became the event, so he ends up looking like more of a global macro fund
    • When he launched they were 60% net long equities and short mortgages
    • He sees event driven as part of global macro
  • What do you look at in event driven?
    • There is no true science
    • When bad assets went from private to public balance sheets
    • In late 2008 he started looking to understand public balance sheet and started to try and get arms around it in a simple way
    • Then they stumbled upon Japan right at a bifurcation point and an inflection point
    • Find some through traditional channels
    • Understand negative convexity really well – very key in event driven universe
    • Hayman doesn’t do a lot of merger arb
  • Argentina
    • Considers it event driven
    • Game theory of politics
    • Tremendous oppty
  • Easy to understand – but how to structure the trades?
    • Argentina – no great way to hedge
    • If you look at curve in Argentina and think they will settle
    • Curve is inverted right now
    • Bonds that are due in 1 year
    • But trade on 17-18% yields
    • They want longest duration, cheapest as % of par
    • So if it does go wrong, you are actually protected
  • Do you look at currency and equity around that?
    • Looks at ups and downs in all asset classes
    • Japan – most of their investment is in the currency
    • In argentina – they have equity and
    • Equity – 3/1 payoff
    • Bonds – 5/1 view of upside/downside
  • How do you construct a portfolio?
    • Where he has complete focus – he can have 10 positions
    • Outside that – he relies on rest of team
  • Correlation between positions?
    • Look at historical correlation
    • In most recent move in Yen – correl between currency and jpn equities changed
    • US 2 year and Yen changed too
    • They assign probabilistic relationships to each
    • Politics as well
    • Game theory and behavioral economics as well
  • Sizing?
    • Even the best in the world struggle w/ sizing
    • I constantly feel inadequate and that is maybe what drives me
    • We carry some of our largest positions right now b/c of our conviction levels
    • 35% in 1 currency position
    • And they upsized that to 150-200% of assets in currency
  • Risk mgmt?
    • They don’t look at VAR
    • Look at Risk mgmt. in its totality
    • Look at positions and portfolio
    • Set position level stops and target levels
    • Will peel back and / or add
    • Portfolio – down 2/ down 5, down 10
    • They have mandatory risk adjustment levels
    • Have an investment committee of 4
    • And have formal meetings when things are going poorly
    • Look at how much of NAV they could lose and sum
    • If we are carrying a yen position that is 100% of NAV and net long equities – those have been higher correlated
    • Oppty is that some of these will decouple
    • Will call sell-side to gather consensus
    • Have generally been w/ the pack last couple of years b/c he agrees with
  • Subprime 2006
    • Everyone told him that he was crazy
    • Wasn’t sure until it actually would happen until it started
    • People who are really good at managing money – have crazy quirks and interesting lifestyles
    • All good people
    • But he lives in constant fear that drives him hard to succeed
    • Positive reinforcement and negative reinforcement
  • How do you manage the negative?
    • That is this year for Hayman
    • It’s tough and it hurts
    • You internalize to a certain extent – talk it out with your team
    • Talk all the time with this team
    • Tremendous network of CIO friends
    • Friend network – intellectual and emotional
    • So public and everyone has a scorecard
  • Managing people?
    • In last year – they have restructured the team
    • More systematic in attracting, developing and retaining
    • Have been a better investor than manager
    • Brought in some one to help turn around
    • Person advises half of fortune 50
  • Are you difficult to work with?
    • Managing people only comes as wisdom and not knowledge
    • Feels a bit like Neo and just seeing matrix
    • It was internal – looking at himself and seeing where his deficiencies
    • Introspection – and self-awareness has been key
    • Humility often absent in this industry – but the great’s do
  • How do you stimulate yourself in terms of ideas?
    • Japan was entirely organically
    • Argentina – was from reading newspaper at Elliot’s actions in Ghana
    • And saw their external debt to GDP
    • Subprime idea came from a phone call with Alan Fournier at Pennant
    • This was golden age of LBO’s
    • Was so fearful of being short equities
    • They were thinking about the rust belt
    • There were already price declines in those regions and job losses
    • On the phone w/ an RBS bond securitization expert
  • Stress management
    • Free diving and spear fishing – his favorite thing in the world
    • Greatest battles we fight our in our own heads
    • Had a springboard diving scholarship in college
    • Diving is 80% mental
    • Free diving – is about learning how to control heartrate and emotions
    • Going underwater is Zen like for him
  • When did you start free diving?
    • He learned from a 17 year old
    • Been fishing partners for 6 years
  • Markets
    • Japan and argentina – primary focus
    • A 3rd emerging one – that isn’t public yet
    • Lack of global liquidity fascinates him
    • Plumbing in credit markets this past October saw unprecedented moves
    • Daily liquidity in ETFs and B-D’s unable to take risks
    • There aren’t circuit breakers – and huge gaps in liquidity and vol as a result
    • What worries him is construct of equities and credit right now
    • Imagine if you were a lever HY fund and you were hedging w/ swaps
    • In October HY spreads move and credits fell – if you were levered you were toast
    • Any credit / yield trades are going to get pulled out – dollar carry trade b/c of policy diversions
    • Central bank intervention has kept vol low in market – which has hurt global macro funds
    • US fed pulling out of QE is taking the training wheels off the market
    • Predicts Calpers announcement saying that they don’t need HF’s will prove to be a market topping event
    • Haven’t even needed to pick
    • Think this year will be good for macro funds
    • Policy divergence is where the money gets made

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