Top investor who made $US2.6b in March rout braces for market turbulence

It has gone down in Wall Street folklore as one of the greatest trades in history – a $US27 million ($37.8 million) bet during the market meltdown in March that returned $US2.6 billion in the space of three weeks. And the mastermind behind it, New York hedge fund titan Bill Ackman, is now bracing for another bout of turbulence.

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"I think the next couple of weeks are going to be a hard time," Ackman told a select group of Australian journalists on a Zoom call last week. "I don’t know that we are going to have certainty around the election, I think it's unlikely we will have it by midnight on November the 3rd."

The COVID-19 pandemic has been a stunning return to form for Ackman, who built a reputation as one of Wall Street's most feared activist investors – buying (and sometimes short-selling) shares in underperforming companies, and then agitating for change.

I won't attempt to explain the mechanics of his now legendary credit derivative trade here*. In short, it was a low risk, high reward bet that corporate securities values would fall. And the thesis behind it was pretty simple: the coronavirus was just beginning to spread uncontrollably, and markets were not adequately pricing in the risks of it.

"It was one of the most asymmetric, low downside, big upside situations I’ve ever seen," said Ackman, who will make a virtual appearance at the Sohn Hearts & Minds investment conference next month.

Before COVID-19, Ackman's vaunted reputation had taken a hit after a calamitous investment in pharmaceutical company Valeant, and a failed short bet against nutrition supplements maker Herbalife. (Outspoken Australian investor John Hempton famously took the other side of both of these trades, and taunted Ackman along the way.)

It was one of the most asymmetric, low downside, big upside situations I’ve ever seen.

Investor Bill Ackman

But his performance during the pandemic has been spectacular, and not just because of his trade for the ages. After he closed out the derivatives bet, Ackman deployed most of the profits back into his core stock holdings, including hotels chain Hilton Worldwide and coffee-maker Starbucks. The timing was again impeccable. Equity prices staged a remarkable turnaround, netting his investors another $US1 billion.

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Stockmarkets around the world have now nearly retracted all of their COVID-19 losses. Yet with the US election approaching its denouement, many investors fear they now have a fresh hurdle to overcome.

A contested election result would be "fairly disastrous" for markets, Ackman says. "The biggest risk to the markets is not to whether Trump or Biden is president; it is making sure there is a smooth transition either to the second Trump administration or to the first Biden administration," he said. "Hopefully we don’t have more civil unrest, more uncertainty, more divisiveness."

Ackman says his activist days are now largely behind him. And tactical derivatives bets aside, most of his focus is on more conventional equity investments.

Although he is cautious about how the next few weeks might unfold, on a longer term basis Ackman is more upbeat. Despite some misgivings about current valuations, especially for big tech companies, he clearly still sees opportunities.

Ackman recently established one of the biggest "blank cheque" investment funds to date, raising $US4 billion from investors to purchase a yet-to-be-identified unlisted company. (Just after the Zoom conference call ended, reports in the US – since denied – said the fund was in talks to acquire a stake in markets data powerhouse Bloomberg. It has also been linked with accommodation booking platform Airbnb.)

"By the second half of next year the world will be meaningfully better," Ackman said. "We will know who the president of the United States is, and we will hopefully have a widely distributed vaccine and a return to a degree of normalcy. Which I think we would all greatly appreciate."

*Ackman bought credit default swaps – a kind of insurance against bankruptcies – against various bond indices. The notional value of these swaps was much more than $US27 million – Ackman's funds could have been on the hook for $500 million annually in premiums. But as bond prices fell, the value of the swaps surged, allowing him to quickly close out the trade at a large profit.

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This article was originally posted on The Age here.

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