September 14, 2011, 3:24 PM EDT

By Katherine Burton

 Sept. 14 (Bloomberg) — William Ackman, founder of hedge fund Pershing Square Capital Management LP, said he’s placed a
wager that would profit if Hong Kong allows its currency to appreciate against the dollar.

“It’s a small trade, but if it’s successful, it will be our most profitable,” said Ackman, speaking at an investor conference today in New York organized by CNBC and Institutional Investor.

The Hong Kong dollar has been kept at about HK$7.80 versus the greenback since 1983. The link has caused it to weaken this year against Asia’s 10 most-used currencies, resulting in rising inflation and increasing debt levels for Hong Kong residents. Chinese authorities would probably view a peg to the yuan favorably, Ackman said.

Tying the Hong Kong dollar to either a basket of Asian currencies or to the Chinese yuan might be a better solution, economists and bankers have said. Still, Hong Kong authorities maintained as recently as last month that they have no plans to change the 28-year peg with the U.S. dollar.

“Hong Kong is having extremely low interest rates while experiencing strong growth and inflationary pressure,” David Dimmock, director of fixed income and currencies at Societe Generale SA in Hong Kong, said in an interview with Bloomberg last month. “The U.S. monetary policy no longer looks appropriate for Hong Kong.”

The implied volatility on two-year options for the exchange rate between U.S. and Hong Kong dollars has jumped to 3.6 percent from 1.7 percent at the start of the year, according to data compiled by Bloomberg. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Implied Volatility

The fixed exchange rate means Hong Kong monetary policy is largely dictated by the U.S., where a 9.2 percent jobless rate and housing slump have led the Federal Reserve to favor near- zero interest rates and asset purchases to prop up the economy. Hong Kong’s 3.5 percent unemployment rate is near the lowest level since 2008 and real-estate values climbed in each of the last 10 quarters, jumping 75 percent in that time. Inflation rose to 7.9 percent last month, the fastest pace since 1995.

Ackman, 45, has been hinting at a new trade since an Aug. 17 investor letter, in which he wrote about “an attractive standalone investment and one that offers significant hedging benefits for our portfolio. For a modest amount of capital commitment, this investment offers the potential for extraordinary profits.”

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–Editors: Steven Crabill, Christian Baumgaertel

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net -0- Sep/14/2011 18:33 GMT

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