Reuters/ Allen Fredrickson
Bill Ackman's Pershing Square has racked up about $5 billion of profits from a pair of prophetic hedges within the past three years.
The billionaire investor's hedge fund raked in $2.6 billion in the spring of 2020, by wagering pandemic fears would roil financial markets. It has made another $2.3 billion or so by betting on interest rates to rise over the past two years.
The shrewd trades have helped to offset declines in Pershing's stock portfolio, and generated cash the fund has used to make fresh investments and bolster its existing holdings.
"We've had some very significant profits from hedges, a decent percentage of which we've realized," Ackman told Interactive Investor in a recent interview. Pershing "made a fortune" with its pandemic play, and spent less than $400 million to erect rate hedges worth around $2.7 billion today, he said.
Pershing declined a request for comment from Insider.
Ackman and his team anticipated the COVID crash in March 2020, and rushed to protect Pershing's portfolio by purchasing credit-default swaps for investment-grade and high-yield bonds — essentially insurance against a wave of corporate defaults. They spent only $27 million on premiums before selling the derivatives for $2.6 billion in late March.
The proceeds from the pandemic hedge roughly offset the decline in Pershing's stock portfolio. Moreover, the fund used the cash to bolster its stakes in Hilton, Lowe's, and other companies. They were rewarded with a strong rebound in stocks over the next few months, resulting in Ackman's fund notching a 70% return in 2020.
Ackman and his team also predicted inflation would rear its head after the global economy reopened from the pandemic, and pent-up demand ran into supply constraints. They began hedging against higher interest rates in November 2020, as they believed the Federal Reserve was underreacting to the inflation threat, and would have to hike rates more aggressively than the market expected at the time.
They've been proven right this year, as inflation spiked to a 40-year high of 9.1% in June, and remained above 8% in September. The Fed has rushed to cool the economy by hiking rates from virtually zero in March to a range of 3% to 3.25% today, and has signaled they could approach 5% next year.
Pershing built a "very large notional short position" against both shorter-dated and longer-term bonds, Ackman said on an earnings call last November, as the fund wagered rising rates would reduce bond prices.
Ackman and his team unwound some of that hedge at the start of this year, after it soared in value to over $1 billion, to fund their short-lived Netflix wager. Yet they quickly rebuilt it in anticipation of more rate hikes, and have watched it appreciate further since then.
Pershing has been hit hard by the stock-market downturn this year, but its return of -20.9% for the year to October 11 has outpaced the benchmark S&P 500's 25% decline over the same period. Moreover, the sell-off could provide Ackman with another opportunity to cash out his hedges, reinvest the proceeds in stocks, and ride the market back up.
