$4 Billion Hedge Fund Makes a ‘Big Short’ Bet Against Tether

Fir Tree Capital Management has its sights firmly set on shorting the stablecoin Tether amid regulatory scrutiny and fears regarding ties with the Chinese debt market. The firm will hedge an asymmetric bet that will limit the downside but if it proves correct, will be enormously profitable:

New York-based Fir Tree has over US$4 billion under management and has structured its position on Tether (USDT) as an “asymmetric trade”, which means the downside risk is small and the potential payoff is large. The fund started to explore taking a short position on USDT in July 2021, reasoning that much of the token’s US$24 billion in commercial backing is tied to Chinese real-estate developers, which are currently struggling.

Therefore, if the paper loses value, it will lead to a potential big drop in Tether’s reserves and the coin’s price. Fir Tree had previously said that betting on this decision could generate profit within 12 months.

Chinese Real-Estate Market Facing Massive Debt Issues

The entire Chinese real-estate market is facing debt of its own, led by the China Evergrande Group, whose liabilities exceeded US$300 billion as of December 2021 when it missed a payment deadline. Tether, the company, has indicated that it does not own any commercial paper linked to Evergrande, but it has been reported that Fir Tree expects some of the commercial paper it does own to lose value.

Tether’s Reserves in Question

Many have queried of late whether Tether has enough cash reserves to back itself. The stablecoin’s quarterly assurance opinion published last month showed a decrease of 21 percent in commercial paper holdings over the past quarter.

In May last year, Tether released a breakdown of its reserves for the first time since 2014, which indicated that as of March 2021, the company held almost 76 percent of the its reserves in cash or cash equivalents. In this category, commercial paper comprised the majority, with 65 percent.

Tether has previously claimed it was 100 percent cash-backed, but the breakdown of the company’s reserves showed that less than 3 percent were actually held in cash. In October, Tether faced a US$41 million fine for lying about its reserves.