Hedge Fund Investors Are In A Currency Battle With China

February 1, 2016 at 11:07 pm
filed under Business, Business Leaders

The world’s second largest economy and Wall Street have squared-off and lines have been drawn in the investment sand. Hedge fund investors like Jim Dondero of Highland Capital Management and Kyle Bass of Hayman Capital Management as well as George Soros and others are selling assets and reinvesting that money in a transaction called the short-sale. The Chinese are upset because the yuan, China’s currency, is the target.

Jim Dondero and the other hedge fund investors are betting that the yuan and the Hong Kong dollar will depreciate over the next 36 months. Dondero is no stranger to that investment strategy. Most hedge fund managers use the short-sale tactic when they are convinced a good investment will go bad in the future. There’s nothing good about China right now. Manufacturing is in crisis mode, the Chinese stock market in in sell-off mode and the consumer market has lost faith in their government. Chinese investors are pulling out of the domestic stock market and investing their money in other markets.

Highland Capital Management is one of the hedge fund firms that reacts to short-sale opportunities before other firms get a chance to react. Highland Capital has offices all over the world, so there is a constant input of new information coming into the Dallas home office. Highland Capital has more than $15 billion in assets under management, and a large chunk of that money has been redirected to the yuan short-sale opportunity.

Mr. Dondero is one of the most respected hedge fund managers in the business. Jim and his partner Mark Okada have built a solid business investing in assets that other firms didn’t want. There’s always an element of risk in investing, but Dondero told Bloomberg.com that the yuan and the China situation is not what he calls a super high-risk situation.

China is in crisis mode, according to Dondero and it is going to take trillions of dollars in reserves to get them out of that mode. Mr. Dondero said the yuan could drop in value by 40 percent over the next three years, and there’s not much China can do about it. The Chinese government will have to let the values of the yuan drop so they can stop the flow of money leaving the country.

Bloomberg.com published an article that said China will let the yuan drop in order to stimulate their economy. But there is always the risk that the government will manipulate the yuan, so short-sale investors are left holding nothing. China told hedge fund investors they would do battle over the yuan. China started imposing rules to stabilize their currency in August last year and they will continue to do so, according to Bloomberg.com.

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