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David has been writing and publishing since 2006.  

This post was written and published prior to September 2023 when David and his prior firm, Family Capital Strategy, merged with Greycourt.  Views expressed reflected David’s personal views at the time and do not necessarily reflect the views of Greycourt.  Posts and information may be out of date and should not be relied upon for investment advice.

Interview with Kyle Bass – Hayman Capital

Feb 23, 2015 | Family Wealth

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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