- Fund long the Russian ruble, Mexican peso against the dollar
- The long currency trades fund the cost of the riyal short
PointState Capital’s Zach Schreiber, who made $1 billion betting against oil two years ago, said he’s short the Saudi riyal against the U.S. dollar, wagering that weaker long-term crude prices and growing costs will cause the country to abandon a three-decade-old currency peg.
Schreiber, speaking at the Sohn Investment Conference in New York on Wednesday, called the currency peg “massively overvalued,” saying the trade could produce gains of 10 to 50 times the money invested.
Saudi Arabia, the largest Arab economy, is in a bind because it depends on oil for about 75 percent of its export revenue and 80 percent of its budget funding. Oil prices have fallen, while the country’s labor costs and defense expenses have risen and will continue to grow.
Schreiber predicted that oil, now at about $44 a barrel, will only climb to around $50 or $55, while Saudi Arabia’s break-even level is $90.
He said he is going long the Russian ruble and the Mexican peso against the dollar to fund the 1.25 percent cost of the riyal trade.
Schreiber calculates that with oil at $50, Saudi Arabia will burn through $80 billion to $100 billion in foreign-exchange reserves per year. The country has “two to three years of runway before it hits a wall,” he said, adding that it should re-peg the currency, which has been trading at 3.75 per dollar since 1986.
Other hedge funds have also jumped into the trade. Knighthead Capital Management, the event-driven hedge fund co-founded by Tom Wagner, has a similar wager, people familiar with the firm said in March. Pershing Square Capital Management’s Bill Ackman has also said he’s shorting the riyal as a hedge against the impact of falling oil prices.
Schreiber’s firm returned about 27 percent in 2014 after fees, helped by a large bet that oil prices would slump. The firm’s profit that year was about $2 billion, with roughly half of that from the oil trade, people with knowledge of the matter said at the time.
Schreiber, who started New York-based PointState in 2011, previously worked for Stanley Druckenmiller’s Duquesne Capital Management, where he ran a portfolio of investments in energy, power, utilities and related commodities. Druckenmiller, a former chief strategist for George Soros who orchestrated a $10 billion trade in 1992 against the British pound, invested $1 billion in PointState at the start. The firm now manages about $10.5 billion.