Billionaire hedge fund manager Kyle Bass recently sat down for an interview with global macro investor Raoul Pal of Real Vision. The interview with Bass is the first in Real Vision’s series the “The Chain”, where well known investors interview their role models.

The Chain with Kyle Bass from Real Vision Television on Vimeo.

Bass covers a broad range of topics in the informal discussion, and chats a good bit about his personal history, investment research methods and current interests. Of particular interest, Bass notes that historically he has been contrarian, but he’s mainly been investing with the pack the last few years.

Kyle Bass Discusses Global Event Driven Investing

Kyle Bass became interested in finance in college

Bass was a math/science geek coming out high school and went to college with the intention of becoming a doctor. But he took as “Options and Futures” as a non-major elective, and absolutely loved it, so he changed his major to real estate finance. Bass ended up with his first job working at Prudential for a year and half then moved on to Bear Stearns, a more entrepreneurial environment. He was in on the ground floor of the hedge fund industry back in 1995.

Established his hedge fund Hayman in Feb. 2006

From the beginning Kyle Bass insisted that his fund was to be global event driven — any asset class anywhere in the world — but he has become more of a macro fund over time as global economic circumstances evolved. Bass emphasized Hayman is still researching and involved in micro, event-driven investments today.

Bass highlights that he assigns probabilistic variables in assessing an investment and that “size of positions is correlated to conviction level”.

Picking investments is an art, not a science

Kyle Bass emphasizes that there is no magic formula for finding good event-driven trades. It’s a matter of understanding relationships (behavioral economics) and forecasting the probability of future events. He discusses the example of Japan, and analyzing the change in demographics. He also mentions Argentina as “tremendous opportunity” as everything is likely to come to a head within 12 months.

Focused on currency, not equities in Japan

Kyle Bass says that Hayman is focused almost solely on currencies in Japan. “Almost the entirety of our investment is in the currencies. I don’t know which way the their equities are going to go. There is this common Pavlovian belief that as soon as the yen weakens, equities go higher. That relationship could break down, especially if the yen moves higher too quickly.  I think the upside-downside in the equities is much different from the currencies. We are much more focused on the currencies in Japan than the equity markets.”

Looks at risk management on two levels

Kyle Bass notes that he keeps very well informed on around 10 positions at a time. But he also notes, “In our key positions, I’m 100% involved.”

He also notes he looks at risk management at both position level and the portfolio risk management. He sets position target levels to add or subtract from positions, and also sets three risk levels for potential portfolio readjustment.

In terms of organization, Hayman assigns an investment committee of four on a specific position, with a larger investment team focused on investment full time

Dealing with a recent restructuring

Kyle Bass notes that he’s a “good investor, but a “poor manager of people”. That;s why he decided to bring in a consultant last year, and says that “…in the last six to eight months we’ve engaged in a beautiful cleansing of the firm.” He notes the process has been “very positive for morale and the strategic direction of the firm.”