The Genius of Bill Ackman : A $2.6 Billon Trade

Bill Ackman
Bill Ackman is known as one of the most controversial and influencial investor in the world with a personal wealth of $2.1 billion. Graduate from Harvard, He founded a Hedge Fund; Pershing Square Capital Management in 2003 which managed roughly $11.2 billion and registered an annual performance of 58% in 2019 (PSCM report of October 2020). You probably know Bill Ackman as the guy who lost almost $3 billion by investing in Valeant in 2015 and shorted the stock of Herbalife in 2012 for $1 billion in vain (See « Betting on Zero », Ted Braun). Recently, he hits the headlines with a trade that made $2.6 billion profit.

The Big Short 2.0
As the coronavirus pandemic started to spread in the World in Mid-February 2020, Bill Ackman got worried about what would happen to financial markets. To protect his portfolio, he put through a bet against $71 billion 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 in 2008. Investopedia define a CDS as « a financial derivative that allows an investor to offset the credit risk. The lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy. » In the case of Bill Ackman’s trade, the insurance premium amounts to roughly $27 million a month or $324 million 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 $2.6 billion profit in a matter of a month only. That led him to mint multibillion-dollar profit in March 2020 through defensive hedge bets as the coronavirus outbreak threatened a deep economic recession. In comparison, Michael Burry’s trade took several years to record profits and could have cost a lot of money if his bet didn’t go his way. One columnist admitted it « may be the single best trade of all time. »

The Post-Trade
After closing the position and realizing large profit, Ackman’s Hedge Fund invest those profits into blue-chip companies at discounted prices such as Starbucks, Hilton, Burger King-parent Restaurant Brands, Lowe’s and Berkshire Hathaway in order to strenghten thier shareholding.

Written on 20/11/2020


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