Delivering Alpha 2011

Hedge Fund Investor Ackman Making Big Bet on HK Dollar

Well-known hedge fund investor Bill Ackman said Wednesday that he's making a big bet on the Hong Kong dollar .

Bill Ackman

Ackman, founder and CEO of the $10 billion hedge fund Pershing Square Capital, is basing the bet on a belief that Hong Kong will allow its currency to appreciate by 30 percent against the U.S. dollar.

The Hong Kong dollar has been pegged to the dollar since 1983. The current statutory exchange rate is between 6.1 and 7.8 Hong Kong dollars to U.S. dollars.

Ackman revealed his latest idea during a keynote presentation at the inaugural CNBC/Institutional Investor Delivering Alpha conference at The Pierre hotel in New York City. (See his full presentation here)

Ackman thinks Hong Kong will change its currency policy sooner rather than later, citing mounting pressures over the continuing weakness in the U.S. economy, rising local inflation concerns, and a coming election for the city-state’s next chief executive in March.

“Based on how Hong Kong historically has responded to similar economic circumstances we believe they will move the peg soon,” Ackman said.

But remarks yesterday from Hong Kong Financial Secretary John Tsang put Ackman's assertion in question.

"We have no intention to change the system," Tsang said responding to pressure to change the peg for the Hong Kong dollar. This has been Hong Kong's standard response to the mounting pressure for ending the peg.

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Others, including HSBC CEO Stuart Gulliver, are recommending that Hong Kong change its currency peg to a basket of currencies.

Ackman's not betting that Hong Kong will change the system, just the exchange rate versus the U.S. dollar. He points out Hong Kong would not telegraph a change in currency policy before it happens. Ackman says even a small appreciation of the Hong Kong dollar above its current 7.8 to 1 exchange rate will make the investment a winner.

Ackman first alluded to Pershing’s H.K. dollar position  as “asymmetric investments which are not only for hedging purposes but which also offer large payoff for relatively modest amounts of capital” in an Aug. 17 letter to investors.

Ackman did not divulge what the investment actually was in that letter.

His most profitable big bet to date, General Growth Properties, returned a mere 30 times the original principal, earning his firm more than $1.6 billion last year. To achieve the bigger return on the Hong Kong dollar, Pershing is relying on call options to increase the synthetic size of its actual HK dollar holding significantly.