Like Jim Chanos, Hugh Hendry is bearish on China.
But actually shorting China has never been a straightforward proposition. For one thing, due to the bubbly nature of the market, you can get your clock-cleaned really fast, even if you’re correct in the medium term. So you have to make related bets. In the case of Chanos, he appears to be shorting commodity/infrastructure players that serve China.
Mr Hendry has constructed a portfolio that targets Japanese corporate credits as some of the instruments likely to be worst affected. The fund has taken short positions through credit default swaps, whose prices reflect the solvency position of issuers, against 20-30 single-name corporate bonds, the majority of which are Japanese.
“Being short China is difficult,” Mr Hendry said. “I could go to China and short equities, but that’s too volatile and I have unlimited loss. I could short commodities like copper, but that would be unlimited loss too, so I don’t like it. I could look for ways to be short Australia or Brazil, but there’s not enough optionality there. Japan is the most exposed economy industrially.”
The CDS trade is obviously the genetleman’s approach to the bet, having been made most famously by John Paulson when he shorted US housing.
Hendry expects his payoff to come in 12-18 months.