Having made many headlines earlier in the year with his rightly apocalyptic perspective on the pandemic, billionaire hedge fund manager Bill Ackman pocketed a tidy $2.6 billion in profits on a massive (credit) hedge he placed amid stock market complacency ahead of its March collapse.
On March 23rd, we completed the exit of our hedges generating proceeds of $2.6 billion for the Pershing Square funds ($2.1 billion for PSH), compared with premiums paid and commissions totaling $27 million, which offset the mark-to-market losses in our equity portfolio. Our hedges were in the form of purchases of credit protection on various global investment grade and high yield credit indices. Because we were able to purchase these instruments at near-all-time tight levels of credit spreads, the risk of loss from this investment was minimal at the time of purchase.
Well, the founder of hedge fund Pershing Square Holdings is at it again, telling The FT that he has put on another massive credit hedge against his long stock book where he sees complacency.
Pershing is up 44% year-to-date, so who can blame him for protecting some of that gain, but what appears to have catalyzed the action is a combination of the vaccine news (which he sees as bearish), the complacency of stocks (seemingly ignoring all possible risks), and the cheapness of the hedge.
The vaccine news “is actually bearish for the market because it will make the whole thing seem less of a threat, people will taker mask-wearing less seriously, and more people will die in the next few months than in the previous period.”
“We’re in a pretty treacherous time generally,” the hedge fund manager warned, “and what’s fascinating is that the same hedge we put on 8 months ago [which was extremely profitable] is available on the same, if not better, terms now… as if there had never been a ‘fire’ and that everything’s going to be fine…”
“At 49bps, the market is saying the world is incredibly safe and everything that is expected to go right will go right…”
Indeed, US HY debt risk premia are now at record lows…
And the cost of credit protection is dramatically cheaper than equity protection…
Ackman said the new hedge is close to 30% the size of the bet he placed in late February, when he bought a set of huge insurance policies linked to $71bn of corporate debt.
Despite commenting that “it’s going to be a depressing, challenging time,” Ackman does offer some silver lining in that he notes “this is different from the hedge we put on in February when we thought it was a near certainty that things would get really, really ugly.” This time, he is apparently more optimistic and still long stocks, adding that “I hope we lose money on this latest hedge.”
We suspect that last sentence is not entirely true, especially given his comments on the asymmetric nature of the hedge payoff if the future doesn’t turn out in the panglossian manner it is priced for.
Watch the full interview below: