Bill Ackman achieved in a month what Michael Burry, the famous hedge fund manager portrayed in the movie ‘The Big Short’, achieved in many years. Bill’s trade will undoubtedly go down as one of the greatest trades in the history of financial markets.
Part 1 of the trade — Buying Credit Default Swaps
As the coronavirus pandemic started to spread in the Western World in Mid- February 2020, Bill Ackman, hedge fund manager and CEO of Pershing Square Capital Management, got worried about what would happen to financial markets. To protect his portfolio, he put through a bet against $71bn worth of investment-grade bonds via the purchase of Credit Default Swaps (CDS). This is a similar instrument used by Michael Burry to bet against mortgage securities back in 2008. CDS is essentially insurance against in case a bond defaults where the acquirer of the CDS would pay an insurance premium. In the case of Bill Ackman’s trade, the insurance premium amounts to roughly $27m a month or $324m a year. The beauty of Bill Ackman’s trade is that he timed his purchase of CDS so well that he was able to turn his position into a $2.6bn profit in a matter of a month only. As a comparison, Michael Burry’s trade took several years to yield profits and could have cost his funds a lot of money if his bet didn’t go his way.
Part 2 of the trade — Invest the proceeds in blue-chip companies
The story doesn’t stop here. As Mr. Ackman started to unwind his CDS position, realizing hefty profits, he started to deploy those profits into buying large positions in blue-chip companies at discounted prices such as Starbucks, Hilton, Burger King-parent Restaurant Brands, Lowe’s and Berkshire Hathaway.
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No big success without controversy
Bill Ackman has made a controversial appearance on CNBC a couple of days before he profited from the sale of his CDS position. In an emotional 28-minute interview on the financial news channel, he claimed that ‘Hell is coming’ to America when referring to the coronavirus pandemic. ‘Shut it down now’, he said of the US economy. He even stated during the interview that the Hilton share price would go zero — this is only a couple of days before he started buying a large position in the company. Some market participants have accused him of sparking fear to tank the market, ultimately benefitting his CDS bet.
A once in a lifetime trade
Bill Ackman has had many setbacks during his investing career. His fund, Pershing Square Capital Management, has made wrong bets on pharmaceutical company Valeant as well as Herbalife, the multilevel marketing group. Bill argued that the latter was a pyramid scheme and ended up losing his $1bn short position after a five-year battle with the company. Whether we like his emotional appearance on CNBC or not, his successful trade during the coronavirus pandemic will ultimately put him as one of the most successful hedge fund managers of our times.