Brian Snyder/Reuters
- Bill Ackman netted billions wagering on something the market thought was a long shot.
- Ackman used a tool that helped fund managers during the 2008 crisis make billions betting against the housing market.
- Excerpts from a new book published in Vanity Fair detail how Ackman hit it big betting on an economic cataclysm.
Bill Ackman made billions calling the COVID-induced market crash and its aftermath, with the hedge fund manager dusting off a playbook from the last financial crisis to net huge profits for his firm.
An excerpt in Vanity Fair from Crash Landing: The Inside Story of How the World's Biggest Companies Survived an Economy on the Brink by Liz Hoffman, details how the famous hedge fund boss made prescient bets on two events markets believed were a only a fuzzy possibility at the time.
As global coronavirus cases were still rising in other countries and as fashion week had just wrapped up, a mass exodus of attendees would spread "this virus to every important city around the globe," Ackman told his investment team in late February of 2020.
Realizing the pandemic would be a market-moving event, Ackman considered dumping stocks most impacted by a lockdown. His investment firm, Pershing Square Capital Management, ultimately decided on a massive hedge, according to Hoffman's book.
This was done through credit-default swaps (CDS), a bit of financial engineering widely associated with the housing market crash over a decade before.
Similar to an insurance policy, a CDS is a contract between two parties in which one purchases protection from another party against financial losses. The swap connects an investor with another buyer who is willing to take on the other party's risk for a fee, and the contract gains value as the event it protects against becomes more likely to occur.
As corporate bond markets tumbled amid fears of an economic shutdown, Ackman's CDS contracts gained in value. Similar to the handful of investment managers who made a fortune betting against the US housing market before it crashed in 2008, Ackman netted $2.6 billion in profits, a hundred-thousand-fold return, in less than a month wagering on something the market thought was a long shot.
In fact, Ackman called two Black Swan events. He not only predicted that the virus would be an economic disaster, but that the country's recovery would be faster than anyone forecasted and kick off a period of historic inflation.
In total, the pandemic-era bets made Ackman a tidy $4 billion profit, acccording to Hoffman's book.