Bill Ackman Finds Shorting Yuan, Riyal More Vexing Than Valuable

  • Pershing Square's wagers against the currencies fall short
  • Government defense of exchange-rate pegs damps returns

Bill Ackman is finding out the hard way the lengths policy makers are willing to go to defend their currencies.

Bets against China’s yuan and the Saudi Arabian riyal, made by the billionaire founder of activist hedge fund Pershing Square Capital Management, have largely failed as hedges against the effects of slumping Chinese stocks and declining oil prices due to intervention by the nations’ central banks, Ackman wrote in his annual letter to investors released Tuesday. Pershing, which has almost $15 billion of assets under management, lost 20.5 percent in its publicly traded fund last year.

“Both China and Saudi Arabia have inadvisably, in our view, continued to expend hundreds of billions of dollars to protect their currencies,” Ackman wrote. “To date, despite the large notional size of this currency/market hedge and continued weakness in the yuan and growing pressure on the Saudi riyal, we have made only a modest profit on these investments.”

Policy makers in both nations are actively propping up their currencies as they look to minimize capital flight and discourage speculation against their exchange rates. China is letting the yuan weaken gradually, intervening when daily declines are deemed too large; Saudi Arabia is burning through its reserves to defend a 30-year peg to the greenback. That’s capping gains from wagers predicated on the currencies’ decline.

Hong Kong Peg

The yuan has slipped 1.3 percent versus the dollar this year after weakening 4.7 percent in 2015. The Saudi riyal is pegged at 3.75 per U.S. dollar.

This isn’t the first time Pershing has made wagers on a currency peg. In 2011, the fund placed a wager that would profit if Hong Kong allowed its currency to appreciate against the dollar. The peg held, but pressures are again mounting on the exchange rate.

The hedge fund’s bets against the yuan and riyal are meant as hedges, Ackman wrote. Pershing started building up puts -- options that allow the purchaser to sell the currency at a set price in the future -- and put spreads on the yuan in August, two days before China’s surprise devaluation of the currency.

Buying currency options was a cheaper way than buying puts on stocks or oil for Pershing to offset risk that Chinese equities were “in bubble territory” and that oil could slide further, Ackman wrote.

The options “have not, to date, served to be a useful hedge against declines in our portfolio as our investments have declined much more dramatically than we would have expected in light of their limited exposure to the Chinese economy and oil prices,” Ackman wrote. “That said, we believe that both currency investments continue to offer an important hedging benefit and represent an attractive risk-reward, and therefore, we continue to hold them.”

The yuan, which is allowed to trade 2 percent either side of a reference rate set daily by the People’s Bank of China, is forecast to slump 2.8 percent by year-end, according to the median estimate of analysts surveyed by Bloomberg.

Twelve-month forwards for the Saudi Arabian riyal, which investors use to bet on or hedge the currency, tumbled to an all-time low of 3.87 per dollar this month. That’s weaker than the country’s 3.75-per-dollar peg, suggesting traders are betting on the end of the three decade peg, according to data compiled by Bloomberg.

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