Kyle Bass: - This is the formula behind my investments

Kyle Bass is one of the most successful investors in the world. To E24 he explains how he reaches his big hits and how he hedges for the future.

JAPAN: Kyle Bass saw both the US housing bust and Greece's downfall coming. Now he's betting that the next economic emergency will occur in Japan. In an interview with E24 he explains the formula behind his investments.

Timothy Fadek/Bloomberg
  • Sverre Rørvik Nilsen

You can read the norwegian version of this interview here.

Kyle Bass is world renowned for making spectacular financial bets with spectacular rewards.

He famously both bet that the US housing marking would collapse in 2008 and was the first to bet against Greece.

Now he's betting against Japan.

All this is well known, but there is a big difference between what Kyle Bass is known for - and what he actually does.

- We run a global hedge fund. 70 percent of our investments are long bets on good assets. Primarily in the US, the investor told

- The whole time I've used the CDS's (debt insurance) as a hedge - not as some big speculative bet.

The formula

Bass has gained global attention for his large scale hedges against the sub prime mortgage lender and Greece, but these are still a fairly small part of his total portfolio.

But these bets, which are what makes his fund properly hedged, secures his long portfolio against futures problems and produce dream-like yields in bear markets.

At a time when every single mutual fund in Norway plunged in both 2008 and later in 2010 and 2011, Bass's Hayman Capital rose significantly in value. The explanation is to be found in the hedge.

- It's really not complicated. It's just simple logic. All we did in 2008 was to follow the risk in the market to its next natural progression. It was clear that the risk moved from companies to nations.

What Bass does with his investments, is not as common in the tightly regulated Norwegian market.

His fund is a so called hedge fund, which makes it possible for him to buy sophisticated products as insurance for other investments. These climb in value when traditional stock investments drop in value.

While Norwegian mutual funds are completely dependent of growth in the stock market, Bass's sophisticated investments reduces the risk of the portfolio as a whole, and can increase in value, regardless of the general market conditions.

During the six years Bass has been operating his Hayman Capital hedge fund, the capital under management has ballooned from 10 million dollars to a whopping 1,5 billion dollars.

The fund has expanded both as a result of an exceptional yearly growth and new money coming in every year.

- In 2008 I went through all countries, looking for the weakest, by taking all assets, adding all debt and dividing with taxes paid.

- For Iceland, Ireland and Japan this number was well above 20.

But no one scored worse than Greece.

Kyle Bass saw an opportunity in guarding his fund against what he saw to be a coming Greek disaster.

- I opted for buying Greek CDS's. We paid 11 basis points for our first confirmed purchase of Greek default basis swaps.

It's unknown at what rate Bass sold the CDS's, but in early 2012 5 year Greek CDS's were traded at a eyepoppingly 25,000 basis points.

This is over 2200 times more than what Hayman Capital and Kyle Bass paid.

Due to rules imposed on hedge funds by the SEC, Bass can not publicly divulge the returns his fund has achieved, which are amongst the best in the world, regarding his risk profile.


First Hayman bet against sub prime lenders. Then it was Greece. Hayman Capital and Kyle Bass's latest "super hedge" is to be found on the other side of the planet.

This time it's Japan.

- What's quite interesting is that we sort of stumbled across Japan. This motivated us to examine the country a little more, Bass tells E24.

- We wanted to see how and why Japan was able to keep it going such a long time. There are some structural reasons for this, but it has been a mystery how Japan has been able to keep it's enormous debt on its book all this time.

(The story continues after the image)

CDS: This is a graph over Greek default insurance for 5 year bonds. From low to high it multiplied more than 2000 times in value.


And then the tragic earthquake hit Japan in 2011, which created what might be an economic catalyst for Japan's great economic future plunge:

- The problem, after the earthquake, is that the trade balance suddenly became negative. This has been positive, but has now turned dramatically negative. They have shut down nuclear plants and are relying on imported coal, natural gas and oil for electricity.

- After the quake the Japanese did not have enough raw materials for production of electronics and had to look abroad. This, coupled with the power plants, has created large, long term change.

Bass and Hayman Capital is expecting the dynamics in Japans debt situation to change drastically.

- The game is over for Japan.

- When they spend more than 50 percent of tax income on interest, while large part of that interest is at zero percent, it's obvious that a 2 percentage points increase will crush them.

Bass says that about half of Japan's debt has an interest rate of zero percent.

According to him, interest rates have remained low since 2009, partly as a result of Japan's central bank buying up a lot of debt to keep interest rates low.

Regarding the timing of a Japanese downturn, Bass is less sure.

- It is very difficult to time this. This is the end of a debt cycle that began after World War II.

- You cannot time this exactly, but within the next 2-3 years this system [Japan] won't work any more.

Bass compares the situation in Japan with a Potemkin village, which is a term for a false facade or surface to hide the true appearance, usually in connection with propaganda.

- My biggest fear

Kyle Bass does not think of himself as a pessimist, but rather a realist:

- As a manager of money, I get paid for being a realist. Not to be an optimist or pessimist.

- It's my job to find information, study as much as possible, come to a conclusion and hedge appropriately.

- Are you afraid of your own success? That you will not be able to repeat it?

- My biggest fear is to fail. In the recent years have not changed my lifestyle, no matter what happened. Working out of Dallas helps me to avoid thinking like everyone else, as opposed to working out of London or New York.

- We are going to make mistakes. I make many mistakes. I think I have done more wrong than right things.

One of these errors happened in 2009, when Bass expected major problems in the Balkans.

- In 2009 we lost money. I was short the Balkans and all PIIGS countries. When they announced the trillion-dollar rescue package, we lost money.

- But I was not mistaken. They still have the same problem in the Balkans. But I did not anticipate the huge rescue package.

End game

If Kyle Bass's next bet ends up to be profitable, and Japan is unable to handle its debt, he already has the next one lined up:

- Based on the chronology, the next big hedge is the US. Europe goes first, then Japan and finally the United States.

- But I hope the US does not pass a point of no return. After all, I'm a patriot.


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