Did Bill Ackman Have Bad Timing?

Bill Ackman presented at the Delivering Alpha conference on Thursday, September 14, regarding his latest bet in the market. He revealed that his firm, Pershing Square Capital Management, bought call option on the Hong Kong dollar, betting that it would appreciate against the US dollar.

His investment thesis was that the Hong Kong Central Bank would decide to delink the HKD from the USD because of differing economic conditions. In 1982, the central bank decide to peg the HKD to the USD because it wanted a stable currency to back the HKD's value while also simplifying trade agreements.

Speculators including Ackman contend that the current state of affairs, including Hong Kong's accelerating inflation and economic prosperity, are making the relationship less stable. Ackman believes that the HKD will eventually be pegged to the Chinese Yuan. The theory is fine and well, however, many people know that theory does not always translate to reality.

What makes the situation interesting is that a comment on the Wall Street gossip blog, Dealbreaker, showed up about two weeks ago calling the exact bet. The post, found under the comments for a Bill Ackman story, stated the exact strategy and reasoning that Ackman announced yesterday. The anonymous poster claimed that he was pitched by the same Deutsche Bank team that pitched Bill Ackman.

The timing of the comment is what catches the eye, however. The post was made "about 2 weeks ago," which could mean on September 1. If it was posted on September 1, Bill Ackman obviously knew about it by then too, and was probably building his position at the time. Assuming that he built a position a week before September 1 with equal allotments during each day, Ackman would have averaged about $7.7899 HKD per $1 USD. Currently, the HKD is at $7.7902. While he is only a few pips off, one would figure that Ackman would have timed it better.

No one can dramatically beat the market all the time. Even though Ackman and John Paulson made billions from the housing bubble collapse, they have not always been so successful. In fact, Paulson's Advantage Fund is down over 30% this year. Bill Ackman may very well be right; rather, the Deutsche Bank analysts may be correct. Ackman, known for making value investments, many times in real estate, has started to delve into global macro strategies.

Only time will tell if Ackman's bet will pay off. Ackman is very close to breaking even and may have to wait for a while. The latest downward move in the currency pair is most likely a function of his announcement. If there is no pressure towards the Hong Kong Central Bank in the following weeks, the Hong Kong dollar may continue to depreciate against the US dollar. There is always the chance that Ackman's timing is amazing, and that the Central Bank decides to peg the HKD to the Yuan next week. If so, the $7.79 valuation will most likely drop immediately.

Who knows how this will play out: Ackman is known for being an activist investor. He may very well be on the phone with Hong Kong banking officials to persuade them to delink from the US dollar. This could also the first time in which a foreign currency wants to delist itself from the US dollar because of economic instability. Global dynamics could very well be different if the shift occurs in Hong Kong.