The Seven-Year Short

bloomberg.com/news/features/2016-08-07/the-seven-year-short-hedge-fund-betting-on-yuan-refuses-to-quit

Mark Hart of Corriente Advisors has been betting that Chinas currency will
collapse. Hes not about to give up now.
August 8, 2016
Bloomberg News
On any given evening, after Mark Hart and his wife have put their kids to bed, hell duck into his bedroom closet and
close the door behind him. Then, by pixel-light, he goes to work. Hart, a hedge fund manager in Fort Worth, has a
single fixation: the Chinese yuan. And at 9 p.m. Texas time, Chinas financial markets are in full-throated roar 13 time
zones away.
Surrounded by shirts and pantsthe closet is more convenient than his basement officeHart, 44, talks to Hong
Kong, parsing the latest numbers and the scuttlebutt from Beijing and Shanghai. In the seven years since this all
started, he might as well have learned Mandarin. (All three of his children speak the language now, unlike their old
man.) Doggedness has cost him millionsnot to mention investors, employees, and, at times, damn near his sanity.
But he wont, or maybe cant, let go now.
Hart says China is headed for a fall.

Hart in his Fort Worth office.

Photograph: Brandon Thibodeaux for Bloomberg Markets Magazine

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Sure, others in finance think so, toonow. But Hart, whos little known outside a small hedge fund clique despite
making a fortune on the U.S. housing bust and predicting the euro zone debt crisis, got in early on the China bear
trade with currency options and held on. And on. And on. To some, hes ahead of the curve. To others, hes so far
behind it he seems to have lost his way.
The world of finance can reward the bold, but it can also devour those whose conviction bends toward obsession.
On one level, Harts story is a familiar tale of one mans attempt to navigate those shoals. On another, its much
more than thatan up-close-and-personal account illustrating one of the most important economic stories of our
time: the ongoing tug of war between the free hand of the global marketplace and the Communist Party of China,
which has sought to harness the power of capitalism without quite submitting to its will. In both stories, the ending
remains unwritten.
Mark is certainly a trend-setter, says Harlan Korenvaes, the 65-year-old founder of $21 billion Dallas hedge fund
HBK Capital Management, who now manages his own wealth. But staying on these high-return, high-volatility
trades could be to his detriment.
Harts case, in a nutshell, is this: Chinas currency is wildly overvalued. By some accounts, the yuans real effective
exchange rate vs. the dollar is twice as high as it was two decades ago and almost 40 percent higher than it was in
2008. Hart foresees a one-off devaluation of at least 30 percent, maybe more, with consequences worse than those
of the global financial crisis. Otherwise, he says, Beijing will just burn through foreign exchange reserves trying to
fight a losing battle.

You have to go through the valley to the other side, Hart says of China. Its not necessarily going to be pain-free.
But its good.
Hart might as well be talking about himself: Hes trudged through the valleys, felt the pains. Before he started betting
against the yuan, his hedge fund, Corriente Advisors, managed $1.9 billion. He started the Fort Worth outfit, named
after a breed of cattle used mainly for rodeo events such as bulldogging, in 2001, at 29. Employing a top-down
approach to investing, he analyzed economic trends, studied price charts, and spoke with people to gauge
sentiment. He did pretty well for himself, too, posting an annualized return of 30 percent through 2006 on rising
markets.
Then he and his friend Kyle Bass, another, more famous Dallas-area hedge fund manager, cleaned up in the
subprime mortgage bust. They bet against the market and sextupled their money in little more than a year. In 2007,
Hart turned his gaze across the Atlantic and betcorrectly againthat European government bonds were headed
for trouble. Some investors saw their money double. In short order, hed made billions for clients. Then he set his
sights on China.

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It seems so long ago now. Even shutting his main hedge fund in 2012 and giving investors their money back after
losses seems ages ago. Harts contrarian ideas previously had gotten him laughed out of meetings with investors
and bankers, but he was laughed out the hardest on the China trade, says Adam Rodman, who worked as an
analyst at Corriente until 2012 and now runs a hedge fund his former boss has backed. For a time, as the markets
moved against him, Hart almost couldnt bring himself to watch.
Yet on this warm May afternoon, hes relaxed, walking barefoot around his office in a converted warehouse he owns
on the outskirts of downtown. Hart is Texas born and bred, a product of the University of Texas at Austin, but his vibe
is more Brooklyn hipster than Texas oilman. A lean 6-foot-2, he gives off a chill surfer-dude air.
Here, in the 24,000-square-foot space far from the canyons of Wall Street, he has a gym, a rec room, and an art
gallery. A chalk-on-blackboard copy of The Raft of the Medusa, that icon of 19th century French Romanticism,
dominates one wall of his lair. Joel Sternfeld photographs hang on the others. The bric-a-brac runs from vinyl
records (the White Stripes are a favorite) to a teapot in the shape of Ronald Reagan with a green Mao hat sitting on
top. A couple of slacklines are installed. Next door, in a second warehouse, hes got a half-pipe for skateboarding.
Hart pretty much has the run of the place. Corriente has only five employees, down from 25 in 2008. Hes not bitter,
at least not anymore. After all, he had a hell of a run. And if this trade pans out, he says, he may make a full
comeback to the hedge fund industry.

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Ive certainly broken a few phones, says Hart.

Photograph: Brandon Thibodeaux for Bloomberg Markets Magazine
To understand how he got here, you have to go back to November 2008. That was when China first caught his
attention. Lehman Brothers had just collapsed. Markets everywhere were reelingexcept in Shanghai. Over there,
the stock market started rallying. Why? Hart was puzzled, yet everybody from George Soros to Marc Faber seemed
to be talking China up in early 2009.
Hart sniffed an opportunity, the kind of market divergence he often seeks. As with all his trades, he dug deep,
reading constantly, carrying stacks of books and charts around with him, and poring over everything from Chinas
consumer savings patterns to nonperforming loans at the nations banks. His research led him to Jim Walker, the
Hong Kong-based economist who predicted the market turmoil that swept East Asia in the late 1990s; Dr. Gloom, as
hes known, was also skeptical of China. Hart began building an informal brain trust, talking to other longtime China
hands such as Logan Wright, now at Rhodium Group, and Victor Shih, a professor at the University of California at
Irvine, who was warning about a credit bubble. I drive people crazy, Hart says. Im constantly prying.
By December 2009, all that prying had helped him formulate his strategy. Harts big play: currency options that would
pay off if the yuan fell sharply. About $225 million from investors poured into his China fund, a special purpose
vehicle with a set mandate and time period. He used the money to buy contracts as far out as two years. It was, in
the scheme of things, a relatively safe bet: If he was right, the payoff would be huge. If he was wrong, the options
bought for a few basis pointswould expire worthless. Hart couldnt blow up; he could only bleed to death. With the
yuan trading at about 6.8 to the dollar, he figured hed give his plan five or so years to work out.
With that, all those restless nights began.
At first, Hart woke up every half-hour to monitor the markets and call brokers in Hong Kong. He was still invested in
Europe, too. It was all markets, all the time. I had $25 billion of notional exposure! he says of his yuan bet, leaning
in close. I wouldnt say it was an obsession. Its a lot of hours, a lot of work. You have to be completely committed.
To some, Hart treads on dangerous turf. Chinas central bank has warded off speculators by making it costly to bet
against the yuan, says Frank Zhang, head of foreign exchange trading in Shanghai at China Merchants Bank. Its
not wise to battle against the Peoples Bank of China, because youre not going to win, he says. Even if there are
pressures for the yuan to weaken, the PBOC will likely manage market sentiment and let the currency fall very
gradually.
Hart takes exception to being known as a China-basher and clarifies that hes not betting against the countrys
central bank, with its $3.2 trillion currency hoard. In fact, he says, he shares the same position as the PBOC: long
dollar, short yuan.

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Hart talks with intensity about his trade, spanning topics from Premier Xi Jinpings grip on power to the implied
volatility of options. He says China experienced an unsustainable economic boom that attracted substantial foreign
capital inflows and fueled excessive credit growth. The resulting imbalancesover-investment, asset-price bubbles
leave it vulnerable to a massive correction. You might assume he developed these ideas on the ground, but hes
actually never set foot on the mainland. Youre just subjecting yourself to hearing what they want you to hear, says
Hart, whos opted to send his analysts instead. The closest hes come is Hong Kongan adult Disneyland, he
quips.
The Texan concedes his trading style isnt for everyoneand sometimes, it turns out, it isnt even for him. After
starting to bet on the yuans fall in 2009, Hart watched as the currency moved in the opposite direction. A year
passed. Then two. Then three. Then four. He was accustomed to making clients billions, yet here he was watching
hundreds of millions of dollars worth of yuan options sink down the plughole. Sometimes, to our detriment, we
looked at these investment ideas not just as work, but as lifes work, says Rodman, his former analyst.
Making matters worse, Hart was losing money on his European trade. His temper began to fray. His employees
became demoralized, and he was barely spending time with his family. His father, also named Mark, was battling
Parkinsons disease. Hart was overwhelmed. I felt like I was under siege, he recalls. I was working harder and not
having any results. He stands up, stretches his arms and legs, and sits down. Ive certainly broken a few phones.
By late 2012 the yuan was still moving against him, strengthening almost 10 percent against the dollar since he
started his wager. With stress taking its toll, Hart took a break to clear his mind. He kept a journal. He read
Hemingway. Finally he concluded he couldnt keep juggling every ball. After 11 years, Hart shut his main hedge fund
and gave investors their money back. His European fund then expired, after losses.
I blame myself. Im the one who f---ed it up, he says, raising his voice and shifting in his chair. One big mistake
that I made was that I believed China would recognize that it would be in their best interest to stop defending their
currency once it became apparent that the days of foreign exchange inflows were over.
It was insane, Hart continues. For a long time Id let these trades dominate my life. I was too dogmatic. He loses
the thread for a moment and then says, half to himself: I was so convinced I was right.

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Closing his main fund was one of the best decisions hes ever made, Hart says: It was incredibly liberating. He
pulled himself together, using Brazilian jiujitsu as an outlet. He went as close to vegetarian as a Texan can, barely
touched alcohol, and made breakfast a regular ordeal: a few forkfuls of sauerkraut (fuel for a healthy gut); sardines
and eggs (paleo staples); a vegetable drink; and a protein shake.
Then, in early 2014, the yuan began weakening. Hart held his breath, hoping to see the epic devaluation hed long
expected. He didnt have much time left; the China fund, all he had left, was nearing its end. In January 2015, he
went so far as to tell clients that a devaluation was imminent. He hoped to raise more money, but there was little
uptake. Mark Hart fatigue, he says. The fund expired in June 2015 without turning a profit. He hung his head and
took the summer off.
Two months later, in August, China devalued the yuan by more than it had since it ended a dual-currency system in
1994. Shock waves rippled across global markets as the currency weakened 1.8 percent on Aug. 11. That might
seem minuscule, but even hardened China watchers were stunned, with Khoon Goh, head of Asia research at
Australia & New Zealand Banking Group, saying he initially assumed financial news wires had published the wrong
exchange rate.
Hart had just returned from a family vacation in Austin and was busy getting his kids ready for the school year. He
almost didnt notice: With no skin in the game, he hadnt been paying attention. Even if hed still had his wager in
place, its not like it would have really made me money, Hart says. It would have on a mark-to-market basis for a
while, but ultimately it wasnt the big one-off devaluation he was waiting for. Nonetheless, the congratulatory e-mails
began pouring in. It was really satisfying, he recalls. It seemed as though my thesis was proving itself.
That thesis happens to remain in play. Last September, Hart decided to take another stab at shorting the yuan and
opened another China fund, raising about $50 million. Since then, others have taken aim at the currencyincluding
David Tepper, Bill Ackman , and Bass, whos started his own China fund. Bill Gross, the former star of Pimco now at
Janus Capital Group, likened the pressure on the yuan to the 1992 attack on the British pound that turned Soros into
the man who broke the Bank of England. Shorting the currency became such a crowded trade, in fact, that early this
year Chinas central bank went on the offensive to drive out speculators.

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Harts latest fund is scheduled to expire in December.

Photograph: Brandon Thibodeaux for Bloomberg Markets Magazine

Hart hadnt put all of his money to work when the PBOC tightened capital controls, intervened in currency markets,
and waged a verbal campaign to support the exchange rate. Hedge funds run by Dan Loeb and Paul Singer were
among those posting losses on the trade, which Hart says he avoided. And hes since slowly added to his wager,
buying yuan options a month or two into the future. My mindset has been much better on China, he says. Ive
been a lot more willing to accept government action. The currency has continued to weaken, hitting its lowest in
more than five years on July 18. Even so, things may be turning around in China, with data from gross domestic
product to retail sales fueling optimism that economic growth will steady. Foreign exchange strategists tracked by
Bloomberg say the yuan will drop just 1 percent vs. the dollar by yearend, while the central bank has pledged
stability against a basket of currencies.
Just how it will end is anyones guess, though Harts latest fund is scheduled to expire in December. He says that
once the yuan weakens dramaticallyand he insists it willhell invest in an exchange-traded fund that tracks the
nations biggest companies. Even if he doesnt win on this China trade, Dallas investor Korenvaes says, hes one
of the first guys that spotted it, and others came aboard.
Outside, the temperature in Fort Worth is approaching 90F. Hart hasnt touched the water bottle in front of him.
Later, in the gym, he grapples with his jiujitsu instructor. He employs a body lock, making his instructor tap out
before releasing him. He let me win, Hart says, laughing. Will China?
This story appears in the September/October issue of Bloomberg Markets. With assistance by Saijel Kishan
and Tian Chen.

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 With assistance by Saijel Kishan, and Tian Chen

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