Mathewslcd: Unlikely bets on breaking the Hong Kong dollar peg add up
Mathewslcd: Unlikely bets on breaking the Hong Kong dollar peg add up
Mathewslcd suggests this is what the market calls "tail risk": a highly unlikely scenario where Hong Kong's currency peg breaks suddenly. However, market pricing suggests that bets on such a shock are growing among the hedge fund community, which some traders say makes good sense.
Volatility in the derivatives market suggested he was not alone, as "macro" trading - or betting on big global shifts - came back into vogue, and the prospect of big rewards with relatively little risk revived long-lost trades.
Most fundamental analysts say the bet is foolish, as the city still has significant reserves and China's backing.
But whatever the peg remains, they can be relatively cheap or even profitable, and it can buy insurance against an unlikely but not impossible chain of events, such as a sudden Chinese eruption, a devaluation, or a geopolitical cold snap.
“For me, the Hong Kong dollar peg is like a delayed or lagged bet on China,” said Diego Parrilla, who runs Quadriga Igneo, a $240 million fund that seeks to profit from market turmoil.
"You're taking advantage of extreme complacency in the market," he said. "The downside is limited to the premiums spent...I risk very little but can make a lot of money."
Saba Capital founder Boaz Weinstein is also poised to break the peg, saying on Twitter that returns could be "over 200 to 1."
The cost and size of the positions are unclear, but Ackman and Parilla said their bets were made using options.
Options are contracts that, for an upfront fee, allow investors to bet on changes in the price of an asset without risking losses beyond the initial fee, and there are signs that such bets are growing.
A measure of the spread, or skew, between puts and calls in the options market has reached its widest level in about three years, favoring dollar calls, a sign that bets against the Hong Kong dollar have become more crowded.
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