How Bill Ackman Made $2 Billion Betting Against the Market During Covid-19

Bill Ackman warned ‘hell is coming’ because of the virus. He then made $2B by betting against markets. The billionaire investor explained that Pershing’s market hedges included credit protection on various investment-grade and high-yield credit indexes. Ackman said that since Pershing was able to purchase the hedges at near-all-time tight levels of credit spreads, the risk of loss was “minimal.” Many people don’t know how is this even possible. The bigger question can anybody just do it?

When companies issue a loan, there is always a risk of default. A credit default swap shifts this risk to an insurance company for a premium. Typically, credit default swaps are the domain of institutional investors, such as hedge funds or banks.

But as retail investors, there many instruments that can serve the purpose of hedging. If you don’t understand hedging, just know that whenever you buy insurance, you are hedging your risk. If you invest in stocks, the best insurance you can buy is options. A call option is an insurance that will pay off when an asset does go up. A put option is an insurance policy that will pay off if an asset price goes down.

So if you worry about a certain asset class, you can essentially achieve the same hedging as Bill Ackman if by buying a put option contract.

Bill Ackman’s Investment Strategy Explained

Pershing Square founder Bill Ackman has achieved phenomenal levels of success during his time on Wall Street. However, it hasn’t always been a straight line up, with the activist investor suffering a number of major setbacks, chiefly from his positions in Herbalife — on the short side — and Valeant, which is now Bausch Health Companies- on the long side.

An activist investor is an individual or group that purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board to effect a significant change within the company. A company can become a target for activist investors if it is mismanaged, has excessive costs and could be run more profitably as a private company or has another problem that the activist investor believes it can fix to make the company more valuable.

Many well-known activist shareholders, such as Carl Icahn, David Einhorn, Nelson Peltz, engage in their business activities through their holding companies or hedge funds.

Why Become an Activist Investor?

Ackman started out as a regular investor but quickly became disillusioned with the way that managers ran the businesses that he wanted to invest in. This quickly led him to the conclusion that the best way for him to deploy his and his investors’ capital was to pursue active change by appointing new executives to manage businesses.

One of his first investments was in a company called Rockefeller Centre Properties, where he was so put off by the decisions made by those managers that he used his stake to turn the business around and make it profitable.