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Ackman Struggling with Hong Kong Dollar Bet

January 14, 2013 | About:
matsandalex

matsandalex

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Bill Ackman of Pershing Square is no stranger to controversy. The hedge fund manager is currently embroiled in a high-profile short sale of shares of Herbalife (HLF).

Last year, Ackman revealed that he was long the Hong Kong dollar as he expected that there would be a change to the peg to the U.S. dollar.

In September 2011, Ackman outlined the currency trade.

“If you can scrape together $1 million,” Ackman said, "you can buy a one-year call option on $200 million in Hong Kong dollars.” Options are priced on volatility, and these ones are cheap, Ackman says, because of the currency peg and stated intentions of officials from Hong Kong’s monetary authority to keep it that way. Those authorities don’t tend to make their decisions far in advance though, so, he says, “They can change the game overnight.”

However, almost 18 months later, the Hong Kong Monetary Authority has continually foiled Ackman's plans.

K.C. Chan, the city’s secretary for financial services and the treasury, again reiterated that the peg would not be changed in an interview with Bloomberg.

“There is no question about the peg at all,” Chan said in a Bloomberg Television interview today at the Asian Financial Forum in Hong Kong. “He will be disappointed. I don’t expect him to realize his bet.”

Chan does not see the current inflows into Hong Kong as abnormal. Ackman disagrees and thinks the peg should be moved upwards by 20% to 30% to stem inflation in Hong Kong.

“The fund flows coming in, as I understand, are mainly for investment into the equity market,” Chan said. “Some of the fund flows are there because the local corporates are borrowing in the U.S. dollar space and China corporates in Hong Kong dollars. What we are seeing is so far quite normal for portfolio allocation and fund-raising activities.”

Thus far, the Hong Kong Monetary Authority has vigorously defended the peg with U.S. dollar purchases. It remains to be seen whether this policy will continue in 2013.

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