Mark Hart spent seven years and $240 million 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 percent 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 demoralized.
“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 predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. “And now the world has changed.”
Read more about Hart’s seven-year wager in this Bloomberg Markets profile.
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 stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied more than 6 percent in 2017. It’s now trading at the strongest level in 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 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 materialized. His second China fund ended in December. All told, he lost between $240 million and $250 million.
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 $800 billion of foreign-exchange reserves over the past two years.
Read more: A QuickTake explainer on China’s managed markets
For Hart, it was a rare miscalculation. His macro hedge fund had returned an annualized 30 percent from 2001 through 2006, while his wagers against the U.S. mortgage market gained six-fold during the global financial crisis. Hart then doubled some of his investors’ money by predicting the European sovereign debt crisis that ensued.
He wasn’t the only hedge fund manager to forecast a yuan crash. Hayman Capital Management’s Kyle Bass, who worked with Hart on the subprime mortgage bet, called for a 30 percent devaluation in February 2016, while Passport Capital’s John Burbank said three months later that he expected a “major” slump within a year. Managers from David Tepper to Crispin Odey made similar predictions in 2015.
While some hedge funds have stuck with their bearish wagers, Hart says the tide has turned in China’s favor. Foreign central banks and institutional investors are adding to their yuan holdings as the country steadily integrates itself with the global financial system, while President Xi Jinping’s “One Belt, One Road” initiative has allowed China to strengthen ties with trading partners across Asia, Europe, the Middle East and Africa.
Hart says Beijing’s capital controls, including a clampdown on overseas acquisitions, have also proven very effective.
“I don’t expect to see many big soccer club purchases by wealthy Chinese,” he said, adding that outbound investments will generally be directed toward the technology industry and the “One Belt, One Road” project.
Record corporate debt levels are still a challenge, but Hart says China is starting to reap the benefits from its “world class” infrastructure and burgeoning tech sector. He’s optimistic about stocks in both of those industries, as well as other emerging Asian nations, Japan and southern Europe, though he declined to talk about specific investments and his fund.
As for the yuan, Hart says he’s not trading the currency — at least for now.
— With assistance by Justina Lee