PSH.L - Pershing Square Holdings

[thowed]

Pete, on 2) for me, some of this is 'diversification' as generally they aren't the kind of stocks I hold otherwise.

 

On 3) very hard to say - one has to hope that he 'stays humble'!  I'm also trying to work out a pattern of Hedge fund guys who get divorced, and any obvious effect on performance (including if there is then a new partner!).  Found one where there is a pattern, though it may be coincidence!

 

1) I'd see it as a bonus - it seems unlikely to widen much further out though.

 

As you say, I've got this wrong over the past few years, though hard not to after the Valeant & Herbalife debacles...

[petec]

To be clear, I was saying *I* have got this wrong in the past!

[thepupil]

it's a combination of discount and Ackman, #1 and #3. But they are very much related. I had little interest in this vehicle at a 0% discount, so it is important to me (though my opinion of Ackman has improved since the great humbling/reset of strategy).

 

I think many successful investors focus solely on the rate of intrinsic value growth of a business, and pay less attention to valuation/discount. I will probably always be a value biased guy and follow a "discount first, then underwrite the quality thereof second" process. Most hugely successful investors, particularly of late, do not follow such a process, but I gotta do what works for me.

 

If Berkshire went up 25% tomorrow, or Pershing Square went up 45% and their discounts closed, I'd own them, but in less size.

 

I think that Ackman will earn a reasonable net return over time. I've watched him and followed him in various forms for about a decade and I've concluded he's unlikely to blow up/permanently impair capital. I think his reputation as a blower upper of funds is not based in fact (and discussed that extensively a little bit back).

 

It will be a bumpy, high conviction, controversial and at times laughable ride, but I think the sum of the pluses and minuses will be a rate of compounding that preserves and grows purchasing power, likely above that of equities generally.

 

I made the argument that he wouldn't blow up at the height of Ackman/Valeant scare and was (figuratively*) buying the bonds. A long biased, low gross, fund of 10 stocks (even when you make mistakes) of decently quality businesses is simply not likely to blow up.

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pshne-pershing-square-holdings/msg252983/#msg252983

 

If I don't think PSH will blow up, and I think Ackman is good enough for his fund to earn an equity like return over time, then I think PSH's "correct" discount is close to 0%. Discounts exists because of problems that cause something to earn a less than required return. Corporate overhead, misaligned incentives, tax frictions, etc. There are other reasons of course.

 

I think it's possible Ackman is one of the better investors of our time, but I am by no means betting on that. If I thought he was, I'd hold PSH in size all the way to a significant premium, which at this time, I probably wouldn't. I mean the guy has absolutely killed it on credit default swaps (2008 he only lost 13%, in part because he made a bilsky's on MBIA CDS and was macro aware as it relates to the housing crisis). He then hedged coronocrisis very well. I'm not saying he's Nostradamus, but I think this speaks to his overall engagement and tenacity. He's not buying sports teams and hanging out in the Hamptons enough to not be all in on his book. He actually cares and is in tune with what's going on / is picking up on things before others. I've met plenty of billionaire hedge fund/PE managers who are clipping management fees and just don't really care; they've won the game. Ackman hasn't won the game until he's thought of as a top 5 investor of his time, and that is a key weakness and strength. It's kind of funny in that PSH is a vehicle that really has no accountability, its a permanent capital LP w/ no real rights. Ackman could phone it in, but his ego/ambition doesn't allow that.

 

A closed end fund specialist might point out that Ackman has higher than normal fees, or that shares aren't that liquid, or that their capital return program isn't as consistent as some crappy CEF that they swing trade the discount on or whatever, or that the empirically observed average discount has been 18% since inception. I hear all those arguments, but from an overly theoretical perspective, if I think something will earn an appropriate return on equity / compound at a good rate, it doesn't deserve a discount to me and I will buy it, viewing the discount as an opportunity rather than "deserved"; I've held Tetragon since 2014/5 and the discount has widened from 40% to 60%. I don't really care that much because NAV has grown from $17->$24 and lots of dividends have been paid. The thesis that they'll earn an equity like return has been correct, so far.

 

The market may not agree with me for a very long time. 

 

I think Pershing Square has the ingredients to compound at a market or better return and therefore think it deserves to exist.  I don't know if I have super high conviction of outperformance over whatever equity benchmark over some time frame. I don't think one can be that precise. I obviously don't expect outperformance to the degree of 2019/2020 and don't expect him to pull another VRX and draw down by so much relative to the market like 2014/5. As a tangential note, I do believe that Pershing Square should attract high quality people to work there. No real outside money, not having to run short book, being able to actually do "private equity in public markets" at scale with lots of fess coming in is a very attractive job in my view. That's not a key component of the thesis, but I think PSH's draw as an employer has very much increased recently now that they're above HWM and really distinguished themself of late.

 

I am attracted to the large discount (21% return tailwind to 15% discount, 43% return to full re-rating) also because I think Ackman cares about the discount. He's purchased 20% of shares, initiated a dividend, is currently trying to increase liquidity and demand. That can't be said of a lot of people who run discounted vehicles. He's not a bureaucrat running some CEF at a large asset manager just clipping a salary. He cares and is doing all that I can ask. I wouldn't expect him to liquidate or to buy back stock even more aggressively (and decrease liquidity / AUM to his own detriment).

 

I don't love the current portfolio. I tolerate it and trust the underwriting they've done. As mentioned by others, it does provide diversification in that I am not attracted to QSR/CMG/LOW/A/FNMA etc. I liked it better when he owned Berkshire lol. but whatever; I trust the process.

 

 

*I couldn't actually buy the bonds, because $250K minimum, is/was too big a position for me.

 

[5xEBITDA]

This was a really great post thepupil, thanks for taking the time on it.

 

I agree that Ackman's reputation for blow ups is misplaced. Gotham Partners had very specific, idiosyncratic issues that are no way comparable to Pershing Square, and Valeant was what it was. I can think of many more investors who've made mistakes more embarrassing than getting involved so deeply in Valeant, Ackman is just very public and very in front of everyone which magnifies the mistakes. It didn't help that Valeant was right after the "Baby Buffett" feature on Forbes (I think? Or Barons, idk). Long form to say that he is still smart, and Pershing Square is still a very legit firm. If he was done, he wouldn't have capital.

 

I disagree that that PSH should trade at a 0% discount to NAV, however. I think its fair to assume there should be some "Ackman" discount, but no where near as high as it is now. I don't have a spreadsheet of other CEFs in front of me, but I'd expect this to probably trade in the median ragne of these plus whatever Ackman discount you want to apply. Maybe this should really be a 15% discount to NAV - still substantial.

 

It wouldn't surprise me to learn that the share structure of PSH is very unfriendly to shareholders as far as voting rights, which I believe you mentioned yourself. CEFs attract a certain type of investor who likes investing in these because they know, if things really go south or there's a problem, they have voting rights and can intervene with management. I wouldn't be surprised to learn if you couldn't do that with PSH. So, a natural part of the CEF buyer part is likely just not there which doesn't help the shares.

[thepupil]

Yep, it’s impractical to expect a 0% discount for all the reasons you mentioned. The CEF folks  like governance, fees, tender offers where they can get overallotments, predictability, hedge ability (for arbs. PSH scores poorly in those respects and we can’t expect the CEF crowd to solely lift up PSH to a reasonable discount.

 

There is also the issue of sheer size. You have to attract a fair amount of loyal holders/ true believers to  Because PSH is a big vehiclle, it’s not like it’s PEO where bulldog can come in and ruffle feathers.

[5xEBITDA]

Yep, it’s impractical to expect a 0% discount for all the reasons you mentioned. The CEF folks  like governance, fees, tender offers where they can get overallotments, predictability, hedge ability (for arbs. PSH scores poorly in those respects and we can’t expect the CEF crowd to solely lift up PSH to a reasonable discount.

 

There is also the issue of sheer size. You have to attract a fair amount of loyal holders/ true believers to  Because PSH is a big vehiclle, it’s not like it’s PEO where bulldog can come in and ruffle feathers.

 

Yep! Another interesting tidbit. You've mentioned Bulldog, who I am familiar with from my adventures with SPACs, but you're right that they are CEF activists. Saba Capital is also a good CEF activist, I'd say probably better than Bulldog but I can't back that up. Saba has done very well this year with credit, and I believe there is an article from Bloomberg talking about how Ackman has money with Saba. I am sure Saba owns some PSH shares, but given their relationship I think it is fair to say that one of the main players you'd expect to help close a CEF discount is effectively out of the market for it.

[John Hjorth]

Good luck messing around with something, that you actually [perhaps] do not like, but it appears cheap.

[thepupil]

Good luck messing around with something, that you actually [perhaps] do not like, but it appears cheap.

 

theme for the day here, but not sure what you mean.

 

i don't follow what you mean by "messing around".

 

I've followed ackman for about a decade and invested a substantial amount of money with him in March/April of 2020. i then trimmed some shares on the way up. with more facts (and wildly different valuations on some other holdings), I reversed some of those trims and added a little more.

 

 

[buffetteer1984]

Too many people love to hate on ackman for whatever reason i'm unsure but you can't argue against his performance.  He's batting close to .800 on all his collective investments and is up more than 800% since inception for pershing square (2005).  I really don't think there are many other investors that have done as well as him over the long term or have given as much detail of each of their investments. 

[Gregmal]

Ackman is one to cautiously admire, but also respect for what he is.

[Gregmal]

Posted in another thread but relevant here, Ackman supposedly was going after AirBNB with the SPAC. Again, if nothing else, what a wily and opportunistic fellow.

[thowed]

To be clear, I was saying *I* have got this wrong in the past!

 

Apologies!  I dashed that off in haste, so it came out wrong.  I meant to say that, like you, I have *also* got this wrong in the past!

 

Pupil (a veritable misnomer), many thanks for your recent long post about PSH, more food for thought.

 

Gregmal - AirBNB - wow!  I hadn't heard that.

 

I agree about the portfolio - most of it is not stuff that I'd normally own, BUT in contrast to some previous eras, nothing looks especially controversial (though I don't know enough about Howard Hughes, and the money he put in for the raise earlier this year).  In addition, I find this sort of portfolio slightly more reassuring than buying most Tech at current prices.

 

God - I remember that Baby Buffett cover... Cringe!

 

Re: the CEF discount, I haven't looked into if London or Amsterdam is where most of the trades take place (I'd guess London).  LSE CEF discounts have tightened up over the past 5 years, and 0 to -5% is not unusual these days (whereas -10% used to be quite standard).  There is also still a paucity of decent USA CEFs listed on the LSE.  Against that is certain governance issues, especially with the long-term debt etc. I believe.

 

[villainx]

For USA base folks, PSHZF is the share?  Is it preferable to be in regular trading account or IRA type?

 

Thanks in advance!

[thepupil]

ownership by US persons is tricky, period. In fact, it's questionable whether an IRA of an accredited person can own it. It would be best to be owned in an IRA that's not a rollover or would not be considered ERISA money.

 

Owning in a taxable account is a no go unless you want to file PFIC form and have it taxed in an onerous fashion.

 

One can buy the less liquid ADR in a non rollover IRA of an accredited investor and I think that it's okay from what I've read.

 

 

The Placing Shares have not been and will not be registered under the applicable securities laws of the United States, Australia, Canada, Japan, New Zealand or South Africa. Subject to

certain exceptions, the Placing Shares may not be offered or sold within the United States, Australia, Canada, Japan, New Zealand or South Africa or into any other jurisdiction where to

do so would constitute a violation of applicable laws or regulations of such other jurisdiction or to any national, resident or citizen thereof. The Placing Shares may not be offered or sold to

or for the account or benefit of U.S. persons (‘‘U.S. Persons’’) as defined in Regulation S (‘‘Regulation S’’) under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’).

The Placing Shares are being offered and sold only to non-U.S. Persons in the Netherlands and selected other jurisdictions in offshore transactions in reliance on Regulation S, provided

such persons are also Qualified Eligible Persons (‘‘QEPs’’) under U.S. Commodity Futures Trading Commission (‘‘CFTC’’) Rule 4.7.

Neither the U.S. Securities and Exchange Commission (the ‘‘SEC’’) nor any U.S. state securities commission has approved or disapproved of the Placing Shares, nor have they passed upon

or endorsed the merit of the Placing or the accuracy or completeness of this Prospectus. Any representation to the contrary is a criminal offence in the United States. The Company has not

registered as an investment company under the U.S. Investment Company Act of 1940, as amended (the ‘‘Investment Company Act’’), and investors will not be entitled to the benefits of

that Act.

The Placing Shares may not be acquired by: (i) investors using assets of: (A) an ‘‘employee benefit plan’’ as defined in Section 3(3) of the U.S. Employee Retirement Income Security Act

of 1974, as amended from time to time (together with the applicable regulations thereunder, ‘‘ERISA’’), that is subject to Title I of ERISA; (B) a ‘‘plan’’ as defined in Section 4975 of the

U.S. Internal Revenue Code (the ‘‘IRC’’), including an individual retirement account or other arrangement that is subject to Section 4975 of the IRC; or © an entity which is deemed to

hold the assets of any of the foregoing types of plans, accounts or arrangements that is subject to Title I of ERISA or Section 4975 of the IRC (‘‘ERISA Plans’’); or (ii) a governmental,

church, non-U.S. or other employee benefit plan that is subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Title I of ERISA or Section 4975

of the IRC.

Each Manager is acting exclusively

 

See this

[fareastwarriors]

For USA base folks, PSHZF is the share?  Is it preferable to be in regular trading account or IRA type?

 

Thanks in advance!

 

I own PSHZF in my Roth IRA.

[thepupil]

A wrinkle / setback and a pretty big error on Ackman's part it looks like, cast doubt on near term FTSE 100 inclusion.

 

I assume this is why PSH is down 4%, widening from a near term tight of  25/6% to about 30% (about average post covid).

 

PSH mid-year letter:

To increase the probability of our addition to the FTSE 100 index, at the end of this year, we will be converting all of PSH’s

management shares to public shares, as management shares are not considered in the index inclusion calculation. This will

add approximately 6 million public shares to our listed market capitalization. Had this conversion taken place previously,

PSH would today be the 99th largest company in the index, and would only need to increase in market cap by 13.1%, all else

remaining the same, in order to meet the FTSE 100 inclusion threshold.

 

Announcement from FTSE today:

FTSE Russell announces that the shares in issue figure of 204,691,894 assigned to Pershing Square Holdings (BS7JCJ8, FTSE 250 constituent) at the June 2020 Review included unlisted Management shares.

 

In order to ensure the correct index composition at the September 2020 FTSE UK Index Series Review (conducted using data as at close on Tuesday 1 September 2020), Pershing Square Holdings' market capitalisation has been calculated using an updated share number of 198,711,866 and has been ranked accordingly.  The updated share number is based on the latest publicly available shares in issue figure as of 8 May 2020 (the cut-off date for share updates which were implemented in line with the June 2020 Review).

 

Please note that as part of the September 2020 share changes, the shares in issue figure of Pershing Square Holdings will be further reduced to 193,718,342 (effective after market close on Friday 18 September), based on information as of 14 August 2020 (the cut-off date for September 2020 review).

 

 

[johnpane]

That looks like FTSE's error, not Ackman's.

[thepupil]

hmmm. to me it looks like Ackman's. am i misinterpreting the sequence of events or misreading it?

 

He wrote his letter saying that they were going to list the unlisted management shares to increase the probability of index inclusion because the management shares are not considered in the calculation, so listing them will help the chances.

 

Then FTSE says they were included already in the June calculation.

 

So it seems to me that Ackman was wrong. Listing the management shares won't help. They were already "priced in/included" if you will.

 

the market's reaction also seems to indicate that Ackman made an error. there was a little excitement / discount tightening in the past few days and that just reversed. Right? NAV report is fine and at all time highs. No big news/moves on the holdings that i can see.

[Jurgis]

hmmm. to me it looks like Ackman's. am i misinterpreting the sequence of events or misreading it?

 

He wrote his letter saying that they were going to list the unlisted management shares to increase the probability of index inclusion because the management shares are not considered in the calculation, so listing them will help the chances.

 

Then FTSE says they were included already in the June calculation.

 

So it seems to me that Ackman was wrong. Listing the management shares won't help. They were already "priced in/included" if you will.

 

FTSE says that management shares were erroneously included in June calculation but won't be included going forward.

[thepupil]

Thank you Jurgis, makes sense, upon a slower read.

 

To jumble things further, when they list at year end, then they will be included

 

So:

June: included in error

September: error reversed excluded

December/March: included correctly after they lost them

[Gregmal]

Yea come on. Bill Ackman doesnt make mistakes. Just ask him!

[Liberty]

Hour-long interview with Ackman from August 24:

 

[thowed]

Just been looking again at PSH for notional CDS exposure and Cash.  I'm keen to see the latest for the end of August.

 

 

At end of July he had Unencumbered Cash of 22%!  That's punchy!

 

Meanwhile the notional CDS have come down from 8,952M at end May to 1,646M at end July.  That's in comparison to 44,871 at end of February when he had his 'moment'.

 

Discount pleasingly at 30 again, but wondering what this week holds for US equities and if I should wait a little longer... Anyway if it does he's got Cash to use.

[thepupil]

Pershing Square Holdings: Reasons To Back Bill Ackman Into The End Of 2020

 

Nothing new here just offers some good stats (top 10% widest of discounts in UK for example)

 

https://www.google.com/amp/s/seekingalpha.com/amp/article/4372975-pershing-square-holdings-reasons-to-back-bill-ackman-end-of-2020

[fareastwarriors]

Inside the Greatest Trade of All Time—and What Bill Ackman Is Investing in Now

 

https://www.barrons.com/articles/the-greatest-trade-of-all-timeand-what-bill-ackman-is-investing-in-now-51600457809?mod=hp_DAY_Theme_1_1

 

 

There are many worthwhile candidates on Wall Street for the Greatest Trade of All Time. There’s Jesse Livermore’s bet that the stock market would fall in 1929. He pocketed something like $100 million in profit, akin to $1.5 billion today. There is George Soros’ 1992 bet that the British pound would fall against a basket of other currencies. When it did, the Hungarian-American investor made $1 billion. Then, of course, there is John Paulson’s extraordinary bet in the years leading up to, and through, the 2008 financial crisis that the market for mortgage-related securities would collapse. He made a profit on the order of $20 billion for his hedge fund investors and himself, as chronicled in Wall Street Journal reporter Greg Zuckerman’s bestselling book, The Greatest Trade Ever.

 

Then there is what Bill Ackman did in March 2020. In the space of three weeks, as the Covid-19 pandemic was engulfing the globe, Ackman turned a $27 million premium paid to buy credit default swaps into a profit of $2.6 billion. He then reinvested a chunk of that windfall in the long positions he wanted to protect by buying the insurance in the first place. In the ensuing dramatic stock market recovery, Ackman made another $1 billion. In short, Ackman’s $27 million bet has netted him and his investors $3.6 billion. The trade might not rank up there with Paulson’s on an absolute basis—$3.6 billion is not $20 billion, after all. But on an internal rate-of-return basis, which accounts for the time value of money and is one of the most important measures of performance in finance, what Ackman did earlier this year may well rank as the Greatest Trade of All Time. No one had ever made 100 times his money in 10 days. And the scale was big enough to matter.

Ackman, of course, is the flamboyant 54-year-old founder of Pershing Square Capital Management, known for his massive wagers, usually on the direction of individual stocks. He isn’t typically known for being a trader. He’s more of a buy-and-hold kind of guy, not unlike his hero, Warren Buffett. Ackman has had some major wins in the past. He doubled his $1.4 billion investment in Canadian Pacific Railway in less than a year and turned a $60 million investment in General Growth Properties into $3.5 billion. But, given Ackman’s lightning-rod personality, he’s even better known for the bets that failed. Among them are his $1 billion face-plant shorting the shares of Herbalife Nutrition (ticker: HLF), the controversial vitamin-supplement manufacturer, and the $4 billion he lost investing in Valeant Pharmaceuticals. The years 2015-18 were disastrous for Ackman; his funds lost money every year, while the S&P 500 index was up (with the exception of 2018). Many people thought Ackman was toast.

But he proved the doubters wrong. In 2019, when the S&P 500 was up 31.5%, Pershing Square was up 58.1%. He’s up an additional 50%, net of fees, through Sept. 15, and his assets under management are back to $11 billion, although that’s down considerably from the $20 billion he once managed.

Though he sees opportunities in the market, Ackman is getting worried again about the macro picture. He thinks we’re in for another spike of Covid-19 cases as colder weather sets in. “The bad news is you’re going to start to see infection rates starting to increase,” he says. On the other hand, there will probably be therapeutics and vaccines to help slow the infection and death rates in the next three to six months. “Those will be the countervailing forces, with the general trend being in favor of putting this behind us,” he adds.

Ackman is more worried about volatility in the financial markets related to the outcome of a close presidential election, if, say, Donald Trump appears to win on election night but Joe Biden wins when mail-in ballots are counted weeks later. “It will not be a fun period in American history, where people feel like the election was stolen from them one way or another,” he says.

Regardless, there will be confusion and unknowns. “If we have a new president, then there’s uncertainty from a policy perspective,” Ackman says. “And if Trump is re-elected, then we have uncertainty in terms of what Trump’s second term is going to look like. It’s going to be a period of political uncertainty. And uncertainty is not the friend of markets.”

Along with his early-2019 marriage to Neri Oxman and their toddler daughter, much of the bounce in Ackman’s step these days comes from his March trade. It all started with a nightmare. Ackman likes to think of himself as Mr. Optimist when it comes to stocks—Herbalife aside. But toward the end of January, he was getting “increasingly bearish” as he learned more about the coronavirus, which had started to spread around the world. By then, the stock and bond markets were both priced for perfection. The Dow Jones Industrial Average hit its peak of 29,551 on Feb. 12, and the average yield on high-yield bonds was 5%, when it arguably should have been twice that on a risk-adjusted basis. Ackman says that he didn’t think the highflying markets could last: “My nightmare was, you had this virus that replicates and infects incredibly rapidly.”

 

He considered locking in some gains by selling big holdings such as Lowe’s (LOW), Chipotle Mexican Grill (CMG), Agilent Technologies (A), and Hilton Worldwide (HLT). He had already sold his stake in Starbucks (SBUX); it had reached his valuation estimate, and its exposure to China was a concern. And he trimmed his 20% position in Chipotle to 15%. But he’s on the board of many of the companies he has big positions in, and there are tax considerations for selling, given how well the stocks had performed. “We’re very supportive of management,” he says. “We’re long-term investors, and we’d look bad if we just blow it out.”

 

Instead, Ackman hedged his long exposure by buying insurance in case the spreads in the bond market widened as the fear of the virus increased. Starting around Feb. 22, he bought protection on three different bond indexes: the U.S. investment-grade bond index, the European investment-grade bond index, and the U.S. high-yield bond index. Since fear was seriously out of style at the time, Ackman’s cost of protection was very low. “The market for credit default swaps had been so tight that the spreads were quoted in fractions of a basis point,” he says.

This was no small operation. Ackman was looking to buy more than $50 billion of notional protection. It took a few days before his intermediaries at Bank of America, Citigroup, and Goldman Sachs could find a principal willing to quote him the protection in $5 billion increments. His agents told the market that a “nontraditional account” was buying. That characterization of Pershing Square was a little misleading, but it was true that Ackman had not bought any CDS since before the 2008 financial crisis. He says that the sellers of the insurance—he thinks they included funds managed by BlackRock and Bridgewater, the huge hedge fund run by Ray Dalio—must have thought, “This trade is only ratcheting in…and some stupid guy who doesn’t know [expletive] about CDS has come into our market and is buying like crazy.” (Bridgewater and BlackRock declined to comment.) Ackman and his partners debated the idea of selling stocks, but instead made the hedge bigger. He concluded that the risk was asymmetrical: lots of upside for little cost.

 

After a week of buying protection, Ackman had accumulated $51 billion of notional protection on the U.S. investment-grade bond index, $18 billion of protection on the European investment-grade bond index, and $2.5 billion of protection on the U.S. high-yield bond index. He says that he owned 26% of the investment-grade bond index at one point. “Imagine someone buying 26% of the S&P 500,” he says with pride. He committed to spending $500 million in annual premiums. But he figured that the hedge would be unwound in 90 days, max, and would cost $125 million. “We viewed this as a trade,” he says, “not a fundamental bet.” He didn’t think that investment-grade companies were going to default en masse. Rather, he assumed that the spreads between Treasury bonds and corporate bonds would widen. Either way, it was a massive notional bet that investors would panic because of the economic implications of the spreading virus, and that he would benefit when they did.

Barely a week after he had put the hedges on, Ackman’s bet began to pay off in a big way. Spreads were blowing out, just as he’d hoped. By March 9, his CDS portfolio was worth $1.8 billion; three days later, it was $2.75 billion. “I’m thinking, ‘Wow, unbelievable!’ ” he says.

But the market was increasingly volatile. On March 9, the Dow plummeted 2,103 points; the next day, the index leapt 1,167 points. The value of Ackman’s hedge was bouncing around, too. “Our hedge goes from being $2.7 billion to losing $800 million of its value,” he says. “It goes to being worth $1.9 billion.” Now he had a new challenge. “The problem with putting on something of huge size,” Ackman says, is that “you have to take it off.”

The boffo CDS position suddenly made up 40% of his portfolio. It was too much volatility even for a fearless hedge fund manager. “It wasn’t risky when we put it on,” he said. “But it becomes very risky, in a sense, now that it’s a 40% position. In a week, it became worth $2.7 billion. And in a week, it can go back to zero.”

By the second week of March, Ackman says, Trump was taking the virus more seriously. He predicted that Treasury Secretary Steve Mnuchin and Jerome Powell, chairman of the Federal Reserve, were going to take substantial action to protect the capital markets. “We’re not going to have a financial crisis like the last time,” Ackman figured. “Would I rather have 40% of the portfolio in something that could go to zero if the government does the right thing?” he asked himself. “Or would I rather sell that whole thing and buy stocks at hugely discounted prices?” Three weeks in, he decided to lock in his gains. He had spent barely $27 million on the insurance premiums, “and it went for $2.7 billion. Then we decided to get out. We sold as quickly as we could.”

Easier said than done. “We’ve got to take the CDS trade off without moving the market,” he says, “and everyone in the market knows how much protection we bought, or they think they know. That’s a dangerous place to be.”

On March 18, Ackman appeared on CNBC. At that point, Pershing Square had sold half of the CDS position and plowed $2.1 billion—some of his profits to that point, plus $800 million cash on hand—back into the stock market. Ackman says he would have sold the entire CDS position on March 12, if he could have. But just as it took time to put the position on, it took seven or eight days to unwind it.

His 28-minute CNBC appearance caused a firestorm. He says that his intention was to send a “very bullish message.” It wasn’t received that way. “I said, ‘Look, we’re at a fork in the road. One path leads to death and destruction and hell is coming. That’s if we do nothing about the virus and it runs roughshod over the country, and we’re in a rolling 18-month disaster and no company can survive. Or we do a hard shutdown of the country for 30 days, but we’re out of the soup in a very short period of time. We can reopen the economy. Everyone’s got to wear masks. I’m very confident the government is going to do the right thing, and that’s why I’m buying stocks today.’ ”

Instead of calming people, Ackman’s comments scared the bejeezus out of viewers. The Dow, down 6.5% for the day when he started talking, was down 10% when he finished. CNBC played the clip of his most alarming comments over and over again. People thought that Ackman was talking the market down to increase the value of his CDS hedges. In fact, he had already unwound half of the hedge and had been buying stocks in a big way. He says his portfolio lost money that day.

The CNBC fiasco aside, Ackman is understandably ecstatic about the trade. He says his “timing was impeccable” in the execution and the successful unwind of the trade three weeks later. “We got out of 26% of the [investment grade] index without moving the market at all,” he says. Even Dan Loeb, his occasional hedge fund nemesis, tipped his hat. “He found a great asymmetric way to hedge market risk at a very low cost,” Loeb tells Barron’s. “He nailed it in terms of his timing.”

Ackman is once again completely long the market. “We have no hedges on,” he says. He remains bullish and maintains high conviction on his holdings. “For the 10 that we own, I think they’ll all be meaningfully higher a year from now,” he says. He regrets selling that 5% stake in Chipotle in March at $900. The shares are more than $1,200 now. “It’s got an amazing digital offering, and a huge percent of their customers went [to] digital delivery, and they’re not losing those customers as the stores reopen for in-house dining and pickup,” he explains. He held on to Lowe’s, which he says is a “huge beneficiary” of the pandemic-inspired home-improvement craze. Another holding is Agilent, the maker of scientific equipment, which has improved its operating margins without layoffs or furloughs, he says, suggesting to him that the current valuation of the company “does not give sufficient recognition to the company’s high-quality business model.”

Ackman bought, and then sold, Berkshire Hathaway (BRK.A). He was waiting for Buffett to deploy some of his $150 billion cash pile after the market crashed in March. But that didn’t happen until the market had nearly fully recovered. He remains in awe of Buffett but decided that he wants to invest his cash himself. Ackman also bought, and quickly sold, Alphabet (GOOGL) stock for only a small profit. “Stupid,” he says.

 

Aside from Ackman himself, the beneficiaries of his recent investing prowess include teacher pension funds in Texas and Arkansas, clients of EnTrust Global, the second-largest holder of Ackman’s Pershing Square Holdings. Unions representing bakers and pipe fitters also have exposure to Ackman. As Barron’s has written, individual investors can invest with Ackman via Pershing Square Holdings (PSH.Netherlands), an overseas closed-end fund available to U.S. investors.

 

There’s no re-creating the March trade. The cost of insurance is too high now. Instead, “we’re keeping a pile of cash around,” Ackman says. He has his shiny, new $4 billion SPAC—and he’s on the prowl. And he has his portfolio of what he considers “super-high-quality businesses that are reasonably insulated from what’s going on in the world.”

In fact, Ackman recognizes that their outsize success is an unfortunate consequence of our new, grim, reality: “If you own super-resilient businesses, they’re going to do better than they would have had there been no crisis,” he says. “The stock market represents the strength of the best and most dominant, best-capitalized companies, and the stock market that doesn’t exist is a market of private, family-owned mom-and-pop stores, and that’s the decimated part of America right now.”