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The Morning Brief: Chanos on China - “More Pain to Come”

Despite the rout in Chinese equities this year, China’s most famous bear says investors haven’t seen anything yet, according to a Wall Street Journal report. Though stocks gained on Thursday, they have nevertheless fallen 28 percent since mid-June, according to the report. James Chanos, founder of New York-based hedge fund firm Kynikos Associates, told the paper that more pain is ahead.

“The story has yet to play out. As long as China adds credit faster than its growth the real story is months and years ahead,” he said. But making money has not been straightforward for China’s bears — partly because the Chinese government is investigating them and partly because it’s hard to establish large short positions in Chinese stocks, the report said.

Chanos has been bearish on China for five years — and over that time his assets plunged from $6 billion to $3 billion as Chinese stocks rose. Today, Chanos says that 20 percent of his portfolio is short China and that the position has made money, though he will not say how much, according to the report.

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The Internal Revenue Service issued new guidelines this week cracking down on the so-called basket options strategy that some hedge funds have used to save billions of dollars in taxes, according to a New York Times DealBook report. Firms using the strategy — which allowed hedge fund firms, most notably East Setauket, New York-based Renaissance Technologies — to avoid taxes on short-term trades will now have to declare these options on their tax returns, as the options are to be labeled listed transactions. Firms that fail to make the declaration, which some tax experts say the IRS flags as a tax shelter, will be penalized. The new guidance is retroactive, going back to January 1, 2011.

This is after a 2014 report from the Senate Subcommittee on Investigations concluded that Renaissance avoided paying a stunning $6 billion in taxes over a decade using these options. The report found that a dozen other hedge fund firms used the options to avoid paying taxes between 1998 and 2013.

“These banks and hedge funds involved in this case used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” said Carl Levin, a Michigan Democrat and chairman of the Senate subcommittee at the time, according to the DealBook report. Renaissance co-CEO Peter Brown responded that the options were “extremely important” because they gave the firm the ability to use more leverage and to protect against failures of its models and programs, according to the report.

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Another hedge fund hotshot has declared his support for Republican presidential hopeful Jeb Bush. David Tepper, founder of Short Hills, New Jersey-based Appaloosa Management, is planning to co-chair a fundraiser for Bush in New Jersey — effectively snubbing Republican presidential hopeful and New Jersey governor Chris Christie — according to a Bloomberg report. Tepper, who has worked with Christie on education reform in the state, is one of about three dozen co-chairs of the event. Others include former Republican National Committee finance chairman Larry Bathgate, former ambassador Clifford Sobel and state Senator Joseph Kyrillos.

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