Back in March, billionaire investor Bill Ackman made a decision: He paid $27 million to buy credit defaults and turned that into a profit of $2.6 billion. He then reinvested part of that in long positions and made himself and his investors another $1 billion. That's $3.6 billion total made on a $27 million investment. Ackman made 100 times his original investment in just 10 days. Now, he's doing it again. When news broke about an effective Covid-19 vaccine, Ackman placed a similar bet. This one is 30% of the size of March's bet. He told news outlets he hopes he's wrong and creditors don't default. He said: "I hope we lose money on this next hedge."
Why is Ackman betting things will go so wrong again? He thinks the news of the vaccine may make some people become lazy or careless about wearing masks and taking other precautions for the virus. Basically, he thinks a lot of people will stop worrying about catching or spreading the virus. And then of course, there's the faction of people who believe the virus is a hoax who've never been careful about protecting themselves or others from it.
Ackman also believes that investors are underestimating the threat of the coronavirus. Even with a mass inoculation against it, he is predicting a rough few months before an economic recovery starts to happen.
When it came to his original big win in March, it all came down to how worried Ackman was about Covid-19. Even when the stock market hit its peak of 29,551 in mid-February, Ackman had the feeling that it wouldn't last. He considered selling some of his company's big holdings like Chipotle, Hilton, and Lowe's. He had already sold his stake in Starbucks. Ackman, 54, is the founder of Pershing Square Capital Management. He typically takes a long hold position on stocks. But he was growing increasingly fearful in a time when none of the other hedge fund gurus were. And then he hit upon credit default swaps. At that time, that particular market was so tight that spreads were quoted in fractions of a point.
Ackman hadn't bought any credit default swaps since the financial crisis of 2008. He set out to buy insurance on his pending trade, having concluded that the upside of his idea came with relatively little cost. At this point, he still viewed it as a trade, not a bet. He still wasn't thinking that companies were actually going to default by the dozens. He went for it anyway. Within a week, it started to pay off. By March 9th, his credit default portfolio was worth $1.8 billion. By the 12th it was worth $2.75 billion. At the same time, the Dow was bouncing wildly up and down and so was the value of his portfolio.
By mid-March, his portfolio had regained 40% of its highest peak and Ackman figured that the Fed wasn't going to let the U.S. have another financial crisis. He figured it would take action to protect the markets. Ackman reasoned that he'd rather have 40% of his portfolio than zero. Three weeks into his bet, he had spent $27 million and made $2.6 billion. He got out and sold it off as soon as he could.
In retrospect, Ackman knows his timing was impeccable on this trade. Now he's trying to duplicate that success on a smaller scale with his latest bet.