While no one usually wishes bad fortune to any group of people of things in life – the structure or setup of modern financial markets (especially derivatives) and capitalism seems to still have a way of ‘rewarding’ certain groups of people (i.e. Armageddon entrepreneurs) in the event of such unfortune.
The latest example of this comes from Japan where a number of investors are sitting pretty with what may be described as extraordinary gains made on bets against Japan or related companies.
We highlighted the example of Hugh Hendry, portfolio manager at Eclectica Asset Management, late last month who was very outspoken with his bearish Japanese trades including buying credit default swaps on about 20-30 single-name mostly Japanese corporations. While his reasoning for the trades had nothing to do with any kind of environmental concern, the latest disaster to hit the country appears to have only helped speed up the realization of his expected return from the trades – even if it had nothing to do with his original thesis.
Mr. Hendry was betting on Japan and its companies as a way to play (his view of) an economic slowdown in China and was originally expecting an 18-month holding period for his trades. The 30% moves seen in some of the Japanese corporates yesterday alone may have given him his sought after returns in just a matter of weeks – albeit for entirely different reasons.
Separately, the WSJ has published a report detailing some of the other potential benefactors to Japan’s unfortune including some familiar names:
- Hayman Advisors LP
- Commonwealth Opportunity Capital
- Nariman Point LLC
The profitability of Commonwealth Opportunity Capital’s trade is quite spectacular as described in the WSJ (though note that the firm may have been losing money for 2 years until now on it),
Commonwealth Opportunity Capital, a $90 million hedge fund in Los Angeles, made a profit of several million dollars on Tokyo Electric on Monday, from an investment of less than $200,000. The annual cost of protecting $10 million of Tokyo Electric’s debt jumped to $240,000 on Monday from $40,700 on Friday.
“Nobody wants bad things to happen to people,” said Adam Fisher, who helps run Commonwealth Opportunity Capital. He said the firm has been betting against Japanese corporate bonds for two years. “But it shows how fragile that heavily levered nation is; there’s very little margin for error.”
Betting against Japan has been a losing proposition for many investors for years. Despite all the debt problems, bond prices have continued to move higher partly because deflation, not inflation, has been the concern. Also, domestic investors own most of the government’s debt and have been reluctant to sell.
But now, facing at least a short-term hit to the economy from the earthquake and the likely need to issue more debt to pay for reconstruction efforts, Japan is seeing its problems magnified.
“Japan’s choices are very, very bad,” said John Mauldin, president of Millennium Wave Advisors. “Japan has an aging population, which is saving less, their savings rate will go negative sometime in the next few years at which point they will have to significantly reduce their spending, increase taxes or print money or some combination of the three.
“In the grand scheme of things, does the earthquake technically move it up further? Yes, but they were already well down the path.”
Mr. Bass and others are wagering against the yen and Japanese government bonds. They also are buying options that pay off if volatility in Japanese debt and currency markets increases.
Even though Japanese debt rose in price on Monday, volatility increased, as did cost of protecting the debt, helping Mr. Bass score a profit on the day, according to a person familiar with the matter. In a note to his clients late Monday, Mr. Bass said the price moves in his investments yesterday were “moderate.”