Kyle Bass called the housing crash. Now he's launching a new fund that will reportedly use 200-times leverage to bet on a Hong Kong currency collapse.

• Kyle Bass is creating a high-risk bet that Hong Kong's currency will break free of its peg to the US dollar, Bloomberg reported Tuesday.
• The founder of Hayman Capital Management has already shorted the currency for more than a year and now plans to use options contracts with 200-times leverage to bet the peg will collapse in 18 months.
• The connection — officially set at 7.80 Hong Kong dollars to a US dollar — has been targeted by investors for decades but remains sturdy.
• Should a combination of coronavirus fallout, anti-government protests, and economic recession break the peg, Bass and his investors stand to print massive gains. If not, his clients will lose all the cash they raised.
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Kyle Bass is stepping up his bearishness toward Hong Kong and making a high-risk bet that its currency's peg to the US dollar will crumble, Bloomberg reported Tuesday.

The founder of Hayman Capital Management has been shorting the currency for more than a year on the basis that Hong Kong's exchange fund will lose control of the HKD-USD connection. Bass now plans to use options contracts with 200-times leverage to bet the currency pairing — officially set at 7.80 per US dollar — won't last for the next 18 months, sources told Bloomberg.

Should the fund manager's conviction stand true, his investors stand to make colossal gains. If he's wrong, his clients lose their entire position.

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It's unknown how much Bass is raising for the position. His new fund will hold clients' cash for at least two years and charge a one-time 2% management fee. Bass will also charge a 15% performance fee that jumps to 20% if the position's return tops 100%, Bloomberg reported.

Bass rose to fame during the financial crisis as one of the few investors to correctly bet against the housing market before it crashed. His new currency bet is a similarly massive and contrarian position. Several investors, including billionaire George Soros, have tried to time the peg's collapse for decades. None has succeeded.

When Bass began betting against the pairing, Hong Kong had just kicked off widespread protests against mainland China's government. The civil unrest and violence dragged the city into a recession in October. Newly stoked tensions between the two governments and lasting coronavirus fallout place new pressure on the peg.

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The 7.80 level isn't without some flexibility. The currency trades between 7.75 and 7.85 against the US dollar and nearly broke out of the upper boundary last year as riots intensified. The Hong Kong Monetary Authority used its reserves to maintain the peg for the first time since 2005.

The options market views Bass' wager as highly unlikely of turning a profit. Data compiled by Bloomberg show markets pricing in just a 6% chance the currency breaks through 7.90 within the next year.

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