Hedge-fund manager Kyle Bass, who made $500 million shorting subprime mortgages during the 2007 crash, said he’s now betting half his firm’s money on a rebound in those assets.
Securities tied to the riskiest mortgages are virtually “bullet-proof,” because even if the U.S. housing market declines by 10 percent, investors won’t take a principal hit on their bonds, Bass said in an interview with Bloomberg Televison’s Stephanie Ruhle on Market Makers. The assets offer a “very safe place” to make double-digit returns, he said.
“We have more than half our money in subprime bonds,” Bass said.
Bass’s Hayman Capital Management LP is boosting its investments in mortgages as the assets produce the hedge-fund industry’s best returns. Firms focused on the market have gained 19 percent this year, compared with the industry’s average gain of 1.1 percent, according to data compiled by Bloomberg.
Mortgage funds have outperformed as the U.S. housing market rebounds, homeowner refinancing remains constrained and the U.S. Federal Reserve buys government-backed debt to try to stimulate the economy. Dallas-based Hayman, which Bass founded in 2005, managed $1 billion at the end of September, according to a firm presentation obtained by Bloomberg News.
Bass said his bullish bets are focused on the top tranches of mortgage securities, which would have to endure a “draconian scenario” of homeowners not meeting their payments before bond investors would be hurt. The assets are the “best investment” at a time when U.S. Treasuries provide no yield, he said.
Bass’s main fund, the Hayman Capital Master Fund, gained 11 percent this year through September, according to the presentation. He started raising money for a new fund focused on residential-mortgage-backed securities earlier this year, two people familiar with the matter said in February.
The European sovereign debt crisis and the so-called fiscal cliff in the U.S. have made the current environment “the hardest period of time to invest in our generation,” Bass said. The fiscal cliff refers to automatic tax increases and budget cuts that will start next year unless President Barack Obama and Congress reach a compromise to reduce spending.
While investors have become less concerned about Europe, Bass said it’s too early to pour money into the region. Yields on bonds issued by indebted nations including Spain and Portugal have fallen since European Central Bank President Mario Draghi pledged July 26 to defend the euro currency bloc at all costs.
Hedge funds buying assets in Europe “might be picking up a dime in front of a bulldozer,” because they will be crushed if the region falls apart, Bass said. Germany is more likely to exit the euro in the next four years than Greece, which faces mounting debts and is struggling repay bailout funds, he added.
Bass compared the predicament facing the stronger nations in the 17-member euro area to being forced to support struggling relatives.
“Let’s not even discuss relatives,” Bass said. “Let’s discuss 17 people that you might have been fighting with for 200 years.”