Kyle Bass, who was just nine years old when he graduated from college, had already established himself as a young finance professional with a lot of ambition. Bass, who spent two years with Prudential Securities as a stockbroker, joined Bear Stearns in Dallas, where he rose quickly through the ranks to become senior managing director by his 29th birthday.
Legg Mason noticed and signed Bass in 2001 to a 5-year contract for the construction of their first Institutional Equity Office in Texas.
Hayman Capital Management was launched in 2005 by Legg Mason, who had raised $28 million and invested $5 million of his capital.
Bass was invited to a wedding in Roses, Spain by an acquaintance who suggested that Bass meet with a senior executive of the Collateralized Debt Obligations group at a large brokerage.
Bass was surprised to discover that US pension funds had stopped purchasing tranches BBB and BBB – subprime bonds two years ago ( , read: US institutions believed they were too risky). As a result, banks created CDOs in order to sell these riskiest tranches, packaged instruments, to foreign buyers.
Bass, sensing an inflation bubble, hired private detectives to find out how easy it was to get a mortgage in America. Kyle’s investigation revealed that more than half of applicants overstated their income by more than 50 percent, yet they were approved for a mortgage because lenders are more interested in quantity than quality.
Plumbers earning $40,000 took out mortgages for $500,000 homes. It was all a hot tinderbox.
Bass took his chance and bought $110M worth of credit default swaps as a bet on the real estate market.
He was right.
The investor, who was featured on Bloomberg TV in December 2007, had made $700M after turning a $110M wager into a $700M gain.
Bass’s flagship funds generated 212% returns in 2007 for investors, and the fund manager was one of the most sought-after names on Wall Street. Michael Lewis wrote about him in The Big Short.Congress asked him to testify. He was a regular in the financial media after the housing collapse.
Kyle Bass was not done. He thought that the subprime crisis was only the canary in a coal mine, which would predict a global currency and debt crash.
Bass, in search of the next crisis after striking gold in 2007, has placed large bets on Greek and Japanese debts, the yuan and yen and the Hong Kong Dollar. Bass believed Greece’s debt problems were “inevitable,” Japan’s central banking policy would cause hyperinflation, and China’s financial system was just a cheap façade waiting to fall.
Then a few funny events happened.
Bass was among many 2012 speculators who believed that Japan would have to increase their interest rates and cause a fall in bond prices any day. He was 10 years early. Bass lost money in this trade, and left the position. The BOJ did not touch its interest rates until December 20, 2022.
Bass then tried to short the Japanese currency, predicting a hyperinflation would drive it to a 200 to 1 exchange rate against the dollar. The yen declined from its record high of 2012, but it returned to its historical range and traded at the same levels in 2015 as in 2007.
Hayman’s Hong Kong Dollar short trade has lost 95% its value.
Bass’s Greek debt short position was the only macro-bet he made after the housing crash, and it returned him 16% of his fund in 2012 while the S&P 500 produced a return of 13.4%. Hardly an outperformance.
While Bass called for a new collapse, the S&P 500 continued to climb, generating a CAGR of 15.33% between January 1, 2009. and December 21, 2019.
Hayman Capital’s flagship fund saw its discretionary assets decline from $2.1B to $524M, as investors tired of the underperformance of recent years ditched it.
Kyle Bass is a one trick pony. He predicted the collapse of the housing market in 2007 and hasn’t been able to have another big hit. Bass was not an anomaly. History shows that investors who make a successful trade tend to underperform in the future.
Crispin Odey won a fortune by betting against European sovereign bonds, but hasn’t been able to repeat that success since.
Cathie Wood, the most popular name on Wall Street just two years ago has seen her Ark fund plummet by 70% ever since “disruptive innovations” went out of fashion.
Michael Burry, The Big Short‘s most famous winner, tweets a doomsday prediction of the stock market every few weeks only to delete his Twitter account when it fails to come true.
Lists could go on for days.
I would like to share some thoughts about this.
When you have made a lot of money in a short time by shorting the impending collapse of the housing markets, you will start to see the same thing everywhere. From European debt crises, to Asian central bank collapses. You wouldn’t say, “Oh, man, these stocks have become overvalued.” If you bet on disruptive innovations and they returned 200% by 2020. Change it up. You’ll say, “I’m right.” Find some more disruptive elements.
It’s also impossible to determine the relative impact of skill vs. luck in home run trades. Bass was correct about the housing collapse. But what if that didn’t occur until 2011? 2014? Would his investors still be with him today? Was he going to run out of cash? He was also right about the Bank of Japan, but he had been ten years ahead. In this game, being early is the same as being wrong. You can develop a thesis with skill, but timing is a matter of luck. When you plan a trade for months and you just KNOW it will work, you attribute your success to your skill.
Everything is cyclical. Value stocks and tech stocks come and go. Diverse sectors and assets, ranging from AI to cryptocurrency, blaze up before they crash. Investors become greedy when stocks rise by 100,200, or 300%. They then grow afraid as the same stocks fall by 50,75, and 90%.
Investors who make outsized profits in a short time are usually able to do so because they catch inflection points on the market. By the time the investor is ready to trade again, the market has changed. What worked well in the past is not likely to work as well a year later.
Hubris is a powerful drug. In 2005, no one knew Kyle Bass when he started a fund worth $33M. When Cathy Wood launched Ark in 2014, no one knew her. Bass and Wood were both popular in the finance world after the housing bubble burst in 2007 and Tesla’s 10x in 2020. Bloomberg and CNBC praised Bass for being one of the few investors who were able to recognize and profit from the housing bubble. These same networks also compared Wood with Buffett, as her ETFs produced market-leading returns.
It feels great to be “the guy” ( , or in Cathie’s case “the woman”). You want the rest of your industry to look up at you in awe, but also with jealousy. You want to remain in the spotlight, to keep that attention. This desire for attention encourages investors to make bets which will keep them at the forefront.
Bass, who generated 212% in returns in 2007, could have invested all of his money in the S&P 500 and sat back, relaxed, and enjoyed the sweet, sweet returns of 15% per year for the next decade. Bass gained fame by making money from crises, so for the next decade he searched for another crisis.
