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Bill Ackman’s Investment Idea: 30% Profit Expected by 2015 from HKD Currency Trade

September 16, 2011

Bill Ackman’s investment idea: 30% profit expected to be had by 2015 from HKD/USD currency trade

Ackman never ceases to amaze me with his in-depth investment presentation idea and his articulation on his thesis. At the recent Delivering Alpha conference, he made a presentation on his investment thesis to go long the Hong Kong Dollar (HKD) which is surprisingly the most undervalued Asian currency. Ackman had briefly mentioned in his couple of his interviews that he favors investments with good risk-reward and asymmetric payoff, which this long HKD trade had presented itself.

He prefaced his thesis by talking about the history of Hong Kong’s currency: In the mid-1800s, HKD was pegged to silver, along with China, but in 1935 it was changed to sterling due to silver prices had rocketing. In the early 70s the HKD was pegged at a fixed rate to the US dollar; then they adopted the floating rate for nine years, followed by pegging it to the USD for the last 28 years at HKD/USD $7.75-7.85 band (shown in chart below).


Hong Kong has a large trade surplus, and it is interesting to note that in 1983 Hong Kong was barely at investment-grade status, but now it is graded triple-A by rating agencies. However, since Hong Kong had been effectively pegged to the US dollar, its interest rates have to be similar to U.S., i.e, at 0% in order to prevent arbitrage speculation.

Ackman opined that there are four principal revaluation alternatives:

1) Allow the HKD to float

2) Re-peg the HKD to trade-weighted basket

3) Re-peg the HKD to RMB

4) Keep the USD peg, but revalue to an appropriate exchange rate

Investment Idea: Ackman believes that a 30% revaluation from mid-$7.8 ($7.75-7.85 band) to 6:1 (i.e., a 30% revaluation) is likely. Why:

1) It would bring HKD back in line with fair value.

2) It would be sizable enough to convince the market that this is a one-time event.

3) A revaluation is consistent with HK’s handling of prior sterling and USD devaluations in the 1960s and 1970s.

4) HK would retain the simplicity and credibility of the USD peg and maintain the current currency board apparatus.

5) It would reinforce the JLMA’s and government’s credibility as responsible stewards of Hong Kong’s economy.

An appreciation of HKD is an acknowledgement of the progress the country has made, reducing inflationary pressures and real estate bubbles to reaffirm its triple-A region, with further reinforcement of HKD’s credibility as a store of value.

One may make these trades to profit from it:

1) Buy HKD outright.

2) Buy HKD with USD leverage: Note negative HIBOR and LIBOR due to cost of carry is low.

3) Buy HKD call options: HKD and its options are so cheap as options are mainly priced on volatility.

It is interesting to note that Ackman had transitioned from activist to investing into currency trade which is more macro investing, i.e., equity, bond, currency and commodity. My take is to purchase HKD in the form of Certificate of Deposit as a source of diversification and low risk-high reward play.

Source: CNBC and Pershing Square's presentation

Note: This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

About the author:

Graduated with BA Economics from National University of Singapore. Passed Level 1 of the CFA examination and CAIA Level I Candidate. Long-biased US equities, with strong focus on small to mid-cap stocks (NYSE, NASDAQ, AMEX, OTC & ADR) utilizing fundamental and technical analysis.

Agnostic investor, trader, writer and perpetual student of the market.

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