Bill Ackman, macro tourist, is back

Bill Ackman is clearly a very smart guy. His hedge fund Pershing Square has notched up compounded net annual returns of over 16 per cent since 2004.

Even this year his concentrated portfolio of big stocks is down only 7.3 per cent, despite the Netflix debacle. That’s impressive, especially after a hat-trick of incredible years. It shows he didn’t just notch those up by carpet-bombing Silicon Valley with capital.

But he is definitely not a macro investor, which makes us wary of his Twitter revelation that he has taken a “large” short position against the Hong Kong dollar.

Our FT colleagues have written about his bet against the HKD’s four-decade peg to the US dollar. It’s a great summary of how the peg works, and the people that have unsuccessfully bet against in the past — most notably George Soros.

And look, we can see why it makes a tempting target, even for a stock jockey. To maintain the peg the Hong Kong Monetary Authority has to follow the Fed’s rate hikes, even if the local economy is wilting. Given the durability of the peg, betting on a break is also going to be a cheap wager to carry, and the returns are insane if it actually does happen. Saba Capital’s Boaz Weinstein has said he bet against the HKD for the same “lottery ticket” reasons.

It’s weird though. Firstly, Ackman has vowed to be less vocal and more friendly, with no more activist campaigns against companies. Yet he seems to be scratching an itch for publicity with an activist campaign against Beijing? Below is his new pinned tweet.

And secondly, this is pretty dang far outside Ackman’s skillset. Yes, sure, Ackman has made a bundle on some big macroeconomic trades, most notably a big CDS bet on corporate distress in 2020, and in 2021 that inflation would accelerate, which has helped contain his losses this year. But Ackman’s record in the field is pretty hit-and-miss.

A decade ago Ackman actually went long the Hong Kong dollar, on the view that they would have to end the peg and let the currency appreciate versus the greenback. Here is a 151-page presentation Ackman made on the trade at the time. (HT Marc Rubinstein). A less-publicised, smaller CDS trade in late 2020 also looks like it cost him.

But the closest parallel to the HKD position is when Ackman went short the Saudi riyal and Chinese renminbi back in 2015-2016, as hedges against China’s economy slowing and oil prices crashing. This . . . did not work out well.

The renminbi weakened a little but remained heavily managed. and the riyal remains at about SAR3.75. The “hedges” provided no succour for Pershing, which lost over 20 per cent in 2015 and 13.5 per cent in 2016.

It’s almost as if policymakers in China and Saudi Arabia don’t care what hedge fund managers think they should do, quite like the stability of managed currency regimes that have been in place for decades, and have the reserves and monetary tools to easily defend them?

There is a world of difference between these pegs and the soft ones that fell like dominoes in the 1990s. As Mike Bird points out, for Hong Kong policymakers the dollar peg is pretty much a “religious matter”. With little care for domestic political sentiment over rising rates and reserves of over $400bn for outright inventions, it’s hard to see a Damascene conversion for the HKMA.

So why do hedge fund managers keep banging their head against this wall?

We suspect that, beyond a natural love for all asymmetric bets, there’s something about the legend of Soros “breaking the Bank of England” that is simply irresistible to all hedge fund managers. Whatever their investment style, they just can’t help themselves.

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