As General Motors prepares for a November initial public offering, hedge fund manager Michael Kao, founder of Akanthos Capital Management, told the audience at the 6th Annual Value Investing Congress that he is going long GM bonds and short the stock of Ford (F).

Kao’s Akanthos makes money by identifying discrepancies in value within the capital structure (the ladder of equity and debt that companies create to structure their financing) as well as between companies. His fund was up 270% net of fees in 2009, and is up nearly 25% net so far this year.

Looking at the continuum of available securities in the U.S. auto industry, Kao pointed out that Ford shares make up the most highly valued, or richest, end of that spectrum and GM bonds and convertible bonds the cheapest.

But in Kao’s opinion, GM shouldn’t trade at such a large discount to Ford. He cited the fact that GM ditched Pontiac, Saab, Saturn, and Hummer, solving the problem of too few models per brand– and now Buick is the fastest growing car brand in the US. The company also cut its dealer network by 30%, and it is the number one auto brand in China, where it has more than 13% of the market.

Kao likes that GM has dramatically improved its balance sheet, with $12 billion in net cash today versus net debt of $30 billion before the company filed for Chapter 11. He added that GM’s recent management shake-up should keep the company on a path of value creation.

The fund manager is not bearish Ford per se, and said that Alan Mulally has impressively steered the company. However, he thinks the pricing gap between GM and Ford is too wide, particularly given GM’s relative strengths. Since Ford didn’t file for bankruptcy, it wasn’t able to cleanse its dealer network or get bigger union concessions, and it is barely a presence in China.

Given that Ford stock has recently broken out to record highs, Kao said that he uses options and derivatives to hedge his short position.

This is not the first time Kao has made a big bet on GM. Back in 2008, bond investors saw how the government disregarded the legal bankruptcy process and, in a politically-driven decision, paid the senior lenders of Chrysler just 35 cents on the dollar and made the junior lenders (i.e. the United Auto Workers) whole. GM bonds fell to a trough of 4 to 5 cents on the dollar.

But Kao believed that GM would be a different story. Chrysler’s senior lenders were hedge funds and troubled banks, and therefore easy for the government to scapegoat. GM’s senior lenders dealt with Main Street investors, a group that was politically dangerous to short change.