Jan. 10 (Bloomberg) -- William Ackman, whose Pershing Square Capital Management LP hedge fund returned 22 percent last year, increased his bet against MBIA Inc. and said the bond insurer may need to raise $10 billion in capital to protect its policyholders.

Pershing Square increased its short positions in stock of MBIA, the biggest U.S. guarantor of bonds, and Ambac Financial Group Inc., Ackman said in an interview on Bloomberg Television today. His New York-based fund is buying more credit-default swaps of MBIA's holding company, which are used to bet on a company's ability to repay debt, he said.

``Most every week we have increased our short position,'' he said.

Ackman, 41, who co-founded a hedge fund, Gotham Partners LP, less than a year after graduating from Harvard Business School, said his bond-insurer bets gained billions of dollars as the stocks and bonds tumbled in recent months.

His stakes in Target Corp., the second-biggest U.S. discounter, and McDonald's Corp. forced executives to take steps to lower costs and consider asset sales. In December 2005, while pressing McDonald's management, Ackman worked a half-day at one of the chain's restaurants in South Florida at the invitation of a franchisee.

Prediction for MBIA

Ackman, who said in November that MBIA would lose $8 billion, increased that to $10 billion after the Armonk, New York-based insurer said yesterday it had guaranteed $9 billion of so-called CDO-squareds, collateralized debt obligations backed by other CDOs. That was more than the $8.1 billion previously disclosed, Ackman said.

CDOs package pools of assets and slice them into pieces with varying degrees of risk.

Ackman has been predicting declines for MBIA since 2002. He held positions against the bond insurer through Gotham Partners, which closed three funds in 2003 following investor withdrawals and a government probe.

``He is the most persistent person I've ever met,'' said Whitney Tilson, a value investor who has known Ackman since college and manages about $160 million in T2 Partners LLC in New York. ``When he thinks he's right, there is no one more persistent and tenacious.''

Tilson owns Target shares and also has short positions on MBIA and Ambac.

Assets Under Management

The investment against the bond insurers fueled Pershing Square's gains last year, said a person with knowledge of the firm's performance. The average hedge fund rose 10 percent last year, data compiled by Chicago-based Hedge Fund Research Inc. show. Pershing Square has more than $4 billion in assets under management, the person said.

``They take pretty big bets,'' said David Nelson, chief executive officer of Greenwich, Connecticut-based hedge-fund manager DC Nelson Asset Management LLC. ``That's a good number.''

Ackman said he personally stands to gain about $500 million should MBIA's holding company fail, and he plans to donate his profit to charity.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. The people who provided returns asked not to be identified because performance numbers are private.

Target's Response

Ackman pressed executives to sell Target's credit-card portfolio. Two months after Pershing Square purchased its stake, Minneapolis-based Target said it was considering the possibility of divesting the unit's loans. Target also said it would buy back as much as $10 billion in shares, another action Ackman sought.

Pershing Square's returns rose even as Ackman's largest positions, retailers Target and Sears Holdings Corp., fell last year.

A December drop of 36 percent led the decline in the fund set up to invest in Target, called Pershing Square IV LP, Ackman's firm said in an e-mail to investors. In total, Pershing Square IV lost 43 percent of its value last year. The declines were reported last week on CNBC.

Target ``is a case actually where I think a mark-to-market loss is not a real loss,'' Ackman said today. Target rose $1.63, or 3.3 percent, to $51.55 at 4 p.m. in New York Stock Exchange composite trading.

Prediction for Target

Ackman, who predicts a $120-a-share price for Target, which was hurt as customer visits slowed during the holiday season. Target said today that sales at stores open at least a year rose 0.6 percent on a calendar-adjusted basis.

Target declined almost 17 percent on the New York Stock Exchange in December. The Pershing Square IV investment is structured so that the returns to investors are double the stock's movement, the person said.

Ackman and investors in the Pershing fund spent about $2 billion to gain control of 81.2 million Target shares. His purchases included equity and options to buy the stock at a predetermined price.

In addition to repurchasing shares and selling the credit- card portfolio, Ackman wants Target to extract cash from its real-estate holdings. He said in a letter to investors last month that he plans to discuss his suggestions with Target's management early this year.

To contact the reporters on this story: Josh Fineman in New York at Jfineman@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net

Last Updated: January 10, 2008 19:52 EST