Is China home to the world’s next economic miracle or a bubble economy fueled by excessive credit growth? Fort Worth contrarian Mark Hart is betting on the latter. With the December launch of a fund specifically designed to profit from the fall in the renminbi, China’s currency, the Corriente Advisors founder believes he has found an asymmetric return profile similar to the short subprime housing bets that earned him stunning profits in 2007.
Corriente argues against the consensus view that the renminbi is stronger than the dollar, instead positing that money supply growth in China has been dramatically greater than in the U.S., as the firm states in marketing materials for the newly launched Corriente China Opportunity Fund. “Relative to the size of the economy, China’s money supply is enormous,” the firm says. “We believe that the relative sizes of U.S. and Chinese money aggregates imply a massive overvaluation of the [renminbi].”
According to investors, the firm is buying put options on the currency, which are now cheap given its low implied volatility, currently less than six percent. That makes the position especially attractive as compared to puts on the yen, which are more popular and expensive as a way to hedge against the likelihood of Japan being able to service its burgeoning sovereign debt. Corriente has told investors that its China bet could potentially pay 50 to one or more if the dollar doubles against the renminbi, but that 100% of capital could be extinguished within a few years if the wager is mistimed.
The flagship Corriente Master Fund was down 50.72% through October 31, given its bearish bets on credit and equities, in particular those of financial companies. In early December, bets against European debt began to pay off for a host of funds, and investors said Corriente had already seen significant returns from those positions. The master fund has produced a net annualized return through October of 22.32% since its July 2001 inception. Corriente is known largely for the more than 500% gain it earned shorting subprime mortgages in a joint wager with Kyle Bass’ Hayman Capital Management.
Josh Friedlander
