“Very negative” stance powered Pershing Square gains – but Ackman does not see protracted slump

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Pershing Square CEO Bill Ackman’s “very negative view” and “good sense of timing” powered the firm’s stellar USD2.6 billion gain last month but the high-profile activist hedge fund manager does not fear a protracted 1930s-style depression as a result of the Covid-19 shutdown.

Pershing Square Capital generated the remarkable return in March with a USD27 million credit hedge as the impact of the coronavirus pandemic sent global markets into a tailspin.

In a podcast interview released this week, Ackman explained how growing concerns over the Covid-19 spread early in the year, and the subsequent economic implications of the US shutdown, formed the basis of his lucrative bet.

“This was one of the few cases in my life where I had a very negative view on where the stock market would go and I also had a very good sense of the timing,” he told Farnam Street’s Knowledge Project podcast.

As cases began to spread outside China, the New York-based hedge fund convened a rare Sunday night investment team conference in the third week of February to discuss the economic implications of the virus, and how the firm would trade the event.

“We came to a group decision that it happens to be a really interesting time in which to hedge credit risk because credit is at the tightest, or the pricing of credit is at the lowest, it’s almost ever been,” Ackman said. “It became a relatively easy decision to put on a large hedge because the inherent asymmetry was about the most attractive it had ever been.”

Ackman put the hedge on in the third week of February. By 12th March, as markets plummeted some 25 per cent, the bet was worth USD2.6 billion. At that point, he decided to exit the position, and began “aggressively” buying stocks, adding some USD3 billion worth of risk as the market rallied.

“We said: ‘We have this massive position hedge which maybe has the potential to double if credit spreads widen to where they were during the financial crisis. But if they don’t, and the government takes the right steps, this hedge could be worth zero and the stock market could go right back up to where it was’.”

Before cashing in, Pershing Square had earlier mulled liquidating its entire portfolio in the face of the dramatic stock market slide. “[But] what if the stock market doesn’t decline as much as we think it might? What if it declines very briefly and we don’t have an opportunity to rebuild stakes in these great business we’ve owned?”

Describing an “elegant” hedging approach, he told the podcast: “If nothing happened we would have lost very little money. But… the more the market went down, the more valuable the hedge becomes. We could cash it in hopefully at the bottom, or as close to the bottom, and redeploy the money buying companies that we like, and that’s what we chose to do.”

Turning to the broader economic implications of the virus, Ackman said he is not concerned about a Great Depression-like event. He pointed to broad economic support from governments globally, and said the US could start reopening in June.

“This is an intended, somewhat artificial, temporary shutdown, not driven by economic reasons but driven by health-related reasons, just to stop the spread of the virus. That’s a very important distinction,” he observed, pointing to some 70 different vaccine-related and therapeutic trials already underway.

“The entire world is working on solutions to the problem.”

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Hugh Leask
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Editor, Hedgeweek