Bill Ackman is a hedge fund billionaire, but he isn’t known for his hedges.
Most of the time Ackman’s fund, Pershing Square, is almost 100% long by way of an ultra-concentrated portfolio of large stock holdings. His current style is to find about seven-or-eight companies he believes strongly in and bet between $500 million and $1 billion on each.
So when Ackman decided to protect Pershing Square’s $6.5 billion portfolio of stock holdings in companies from Chipotle to Berkshire Hathaway and Lowe’s, it was out of the ordinary. By the end of February, Ackman had come to believe that the coronavirus pandemic was a massive risk for the United States, its economy, and global financial markets.
He and his traders spent $27 million buying all the portfolio protection they could find. Ultimately, they focused on credit markets. With spreads that are a gauge of riskiness and fear at record lows, Pershing Square bought far out of the money protection against investment-grade and high-yield bond indexes. The hedges were designed to protect Pershing Square against an explosion of risk and volatility if the coronavirus spread. If that happened, they expected spreads to widen enormously, putting their ultra-convex bets into-the-money and protecting their portfolio against a sharp drawdown in equity markets.
The hedges worked brilliantly. The S&P 500 Index has shed about a quarter of its value in a month, but Ackman did fine.
Ackman judged that governors across America and officials in Washington were taking the right steps to combat the spread of the pandemic and support the U.S. economy. The windfall was enormous. The $27 million he spent on protection had turned into $2.6 billion.
The man isn’t one to move slowly. In about a day, he then spent about $1.5 billion re-building a position in Starbucks, and adding to companies like Agilent, Berkshire Hathaway, Hilton, Lowe’s and Restaurant Brands, the parent company of Burger King and Popeye’s. He continues to sit on about $1 billion in cash that still can be deployed as containment, or even recovery, becomes more evident.
“We continue to expect that markets (and our performance) will remain volatile, and therefore, new opportunities may present themselves that are superior to investments we currently own,” Ackman told his investors in a letter.
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