Hedge Fund Managers Ditch Decorum in Shouting Match Over China

EJF Capital's Friedman says the bearishness has gone overboard while MB Advisors's Berg joins with the naysayers at SALT conference.

A fiery exchange between money managers Emanuel Friedman, Milton Berg and Don Brownstein broke with the polite decorum of the SkyBridge Alternatives Conference, one of the biggest annual events for the hedge fund world. Thats because the topic was China.

Friedman, co-founder of hedge fund EJF Capital, said he was reminded of overblown reactions to the late 1990s Asian financial crisis: People said, Well Korea, its finished, its collapsed. People are in the streets.

The issue is not that,shot back fellow panelist Berg of MB Advisors. The issue is not that! Friedman then shouted, People are in the streets!” his volume rising as he repeated it five more times.

China, where a currency devaluation sent shock waves worldwide last year, is dividing the biggest names in finance more than any other market. Larry Fink of BlackRock Inc. said in April that Chinas aggressive policy to stimulate the economy is working and the risk of a bubble bursting is only about20 percent. Billionaire investor George Soros said last month that the nations debt-fueled economy resembles the U.S. in2007-08, at the onset of the global financial crisis.

The clash Wednesday at the Bellagio hotel inLas Vegas, where 1,800 hedge fund industry executives are gathering, contrasts with last years meeting, where many money managers expressedconfidencein China. Last May, Passport Capitals John Burbank — now a China bear — predicted that China would come through its economic slowdown strong and positive. Michael Novogratz, who at the time ran Fortress Investment Group LLCs macro fund business, predicted that the country was on the brink of one of the greatestbull marketsweve seen.

Herd Mentality

China Investment Corp.s Roslyn Zhang and others found themselves on the defensive on Wednesdays panel. The CIC executive saidhedge fund managers, many of whom have never been to China, were succumbing to a herd mentality in betting against the yuan.

They really dont know much about China but they just spend two seconds and put on the trade, she said. Should we pay 2 and 20 for treatment like this? she said, referring to industry fees, traditionally 2 percent of assets and 20 percent of profits.

Zhang, a managing director at the nations largest sovereign wealth fund, said investors fail to grasp that Chinas massive size requires large-scale construction, pushing back at concerns that the country is building bridges to nowhere. She said the countrys leverage and militarization compare favorably with the same metrics in the U.S.

When you put that all together, China is actually not that scary, she said. If youre worried about China, you should be twice as worried about here.

Bearish Bass

If Zhang was spearheading the bulls, then Kyle Bass was leading the bears. Bass, of Hayman Capital Management, said at a later discussion that Chinas economy was already experiencing ahard landing, creating one of the biggest macro imbalances the world has ever seen.” Bass, whos highlighted woes in the nations banking sector, said economies closely tied to China, such as Hong Kong and Malaysia, are beginning to stumble.

Credit in Southeast Asian emerging markets including Malaysia and Thailand has grown recklessly and Hong Kongs property market is in free fall, he said.

Money managers on stage with him mostly agreed. It may be a little slower than Kyle thinks, said Kenneth Tropin, founder of the $12 billion macro hedge fund Graham Capital Management. But a spike in commodity prices, driven by Chinese retail investors, is a sign that things may become unglued, he said, adding, its a question of timing.

At least five commodities in China gained more than 50 percent from their recent lows in just over two months as daily turnover on the nations futures markets jumped by the equivalent of $183 billion.

Vote Sanders

Paul Brewer, chief investment officer of Rubicon Fund Management, said Chinas woes are worse than the U.S. subprime housing crisis.

Leon Cooperman, who runs equity hedge fund Omega Advisors, was more sanguine about prospects for the worlds second-biggest economy. China has been slowing for years without thwarting a three-year rally in U.S. stocks. “Its overemphasized as an issue,” he said.

We are going to have ripples in China, saidEJFs Friedman. But this is a very powerful country. And the people who use it as some kind of bogey man — its make believe.”

Structured Portfolio Managements Brownstein concurred. China came out of a huge, huge mess and it is a huge country with a very, very diverse population, he said. I would rather put my money with a communist government than a capitalist government.

Berg suggested: Vote for Bernie Sanders.