Hedging His Bets...Again

As I was reading the Financial Times yesterday morning, I came across an article with the title “Ackman Places New Bet Against Corporate Credit.”

The Ackman is this case is Bill Ackman, the manager of Pershing Square Capital Management, arguably one of the most high-profile hedge funds in the world. Articles like this always get a lot of attention in finance circles. I can understand why. I spent 10-years on a sales and trading desk and hedge funds made up the bulk of the clients with which I interacted. They tend to be extremely smart investors with a large stable of resources at their disposal. So I generally sit up and take notice when these articles come along.

The Ackman piece is all the more interesting because Bill is fresh off a really impressive trade that earned his fund a $2.6 billion (with a B) profit. Read about it here. Bill was correct in seeing that COVID was going to be big deal and he took measures to protect the capital that had been given to him by his clients. You see, the signs were actually there prior to March that COVID could be an issue, you just needed to have the time and the resources to connect the dots. In mid-February, none other than Apple (APPL) gave the world a glimpse when they said the virus was going to impact their business. This was all while most people thought it was “just the flu.” Bill anticipated that governments around the world were going to have shut down their economies and that is exactly what played out. He bought the financial market’s version of insurance policies, paid about $27 million in premiums and then waited. As market’s around the globe cratered, he sold his insurance and pocketed the $2.6 billion difference as essentially everyone else was looking for flood insurance as the hurricane was making landfall.

So what do we have? A high-profile hedge fund manager, who just made a big profit by anticipating a big event, is betting on something bad happening in the market. The question is should we care? My view, and answer, is it depends. If you have the same timeframe and risk profile as Bill, you may want to pay close attention. How many people meet that criteria? Additionally, how many people have a portfolio with a similar make-up as the one that Pershing Square currently has?

Finally, who is to say that he is going to be right? While he is an extremely successful investor, he is not infallible. He loses money sometimes just like the rest of us. Sometimes in a spectacular way. Bill is famous for making a big and extremely public bet against Herbalife. He started his crusade against the company in 2012. In 2014, he presented the idea at an investment conference. You can see the slides here. The bet worked for a while but then it didn’t. Bill stuck to his guns despite the fact that the market was telling him he was wrong (the stock kept going up) until it was reported in February 2018 that he had thrown in the towel. The entire saga is capture in the book “When the Wolves Bite” by CNBC’s Scott Wapner and is extremely entertaining. By the way this is another reason I like to use technical analysis, you can literally see when the market disagrees with you.

My point is not to knock Bill Ackman. I do believe he is one of the best investors in the world. But he gets it wrong sometimes. The point is that articles like this are to be taken with a grain of salt. Bill is making a specific bet based on his timeframe and risk profile, which are different for everyone. Keeping an open mind, I am not going to dismiss it completely. If I see something in the market that requires changing my views, I will do so.

By the way, the article goes on to say this: He said the new hedge is close to 30 per cent the size of the bet he placed in late February. So number one, it is not even an outright bet but a hedge. Number two, it is less than one third the size of what he did in February. We also learn this later in the article: Mr. Ackman said he remained optimistic about the economy over the long term, saying that it was likely to see a “robust recovery”, but he predicted the next few months would be “a challenging time”. So now we know the time frame on the bet and we also know that Bill thinks the economy is likely to see a robust recovery…something I have been writing about here.

One final point that he made, which is really interesting, is that the vaccine news that we receive on Monday is actually bearish in the near-term. What? Yup, to the extent that the coming vaccine cause people to become complacent about wearing mask and and view the virus as less of a threat, he thinks that that is a concern in the near-term. I actually don’t disagree. A vaccine is coming, but we have to do all that we can to get to that point safely.