Hedge fund manager turns bullish on China after seven years

NEW YORK: Mark Hart spent seven years and US$240mil waiting on a crash in China’s currency.

He lost sleep. He lost clients. He damn near lost his sanity.

And now he’s lost his conviction: Hart, who called for a more than 50% yuan devaluation last year, has turned bullish on China and its currency.

His reversal hasn’t come easily.

From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart’s personal life and left his employees demoralised.

“I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,”

Hart, who started the yuan bet after pre- SAN FRANCISCO: dicting both the US subprime mortgage bust and the European debt crisis, said in a telephone interview. “And now the world has changed.”

In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point.

Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling.

He calls it China’s “whatever it takes” moment – when policy makers resolved to prop up the currency at any cost.

“China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,” Hart said.

Whether or not China got help from other G-20 nations, the government has clearly succeeded in stabilising the exchange rate. The yuan ended a three-year slide in late December and has rallied more than 6% in 2017.

It’s now trading at the strongest level more than a year versus the greenback.

Even at its weakest point, the yuan never dropped enough to move the needle on Hart’s wager.

He started the bet in 2009, running dedicated China funds that would invest for a set period of time.

Hart bought options that were designed to deliver one of two outcomes: a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.

The trade went against him almost from in the beginning. After holding steady for the first six months of 2010, the yuan strengthened for the next three and a half years.

It eventually reversed course, but the sharp devaluation that Hart had anticipated never materialised.

His second China fund ended in December. All told, he lost between US$240mil and US$250mil.

In an interview with Bloomberg Markets last year, Hart said his biggest mistake was believing that China’s leaders would find it in the country’s best interest to let the yuan slide (a one-off devaluation, Hart argued, would remove an incentive for capital outflows).

Instead, policy makers went to extreme lengths to prop up the currency, tightening capital controls and burning through more than US$800bil of foreign-exchange reserves over the past two years. — Bloomberg