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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