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Bill Ackman calls market bottom as Pershing Square banks $2.1bn hedging gains

25 March 2020

Activist hedge fund manager draws a line under the stock market rout retiring recent bets on bond prices made to protect Pershing Square Holding from big falls in its US equity investments.

Pershing Square Holdings (PSH), the investment company investing in Bill Ackman’s long-only hedge fund, has closed the hedges put in place to protect the fund from the coronavirus crash and called the bottom of the market.

In a letter to investors published today, Ackman revealed Pershing Square completed the process of exiting the hedges on 23 March, netting a gross $2.1bn for PSH, after turning ‘increasingly positive on equity and credit markets’.

The activist investor also disclosed the nature of the hedges, taken out at the beginning of the month as being ‘credit protection on various global investment grade and high yield credit indices’ – effectively a bet investors would buy safer government bonds and sell riskier corporate bonds, widening the ‘spread’ between their yields.

‘Because we were able to purchase these instruments at near-all-time tight levels of credit spreads, the risk of loss from this investment was minimal at the time of purchase,’ he wrote.  

Numis called the trade a ‘significant boost to the performance of the fund’ with the $2.1bn windfall, representing nearly 40% of net assets at the end of February, helping to offset falls in the concentrated portfolio of US stocks.

The announcement comes a day after Wall Street posted its biggest one-day gain since 1933 on anticipation of a now agreed $2tn economic stimulus package.

Ackman cited the prospect of this, the way many US state governments have ‘aggressively’ implemented lockdowns and ‘unprecedented’ federal and US Treasury intervention to bolster and keep financial markets functioning as reasons to believe the ‘temporary but massive economic shock’ could be overcome.

The somewhat opaque structure of PSH means the exact success of the hedge is difficult to gauge before the latest net asset value (NAV) figures are published later today. To 17 March, the NAV of PSH was down 6.5% versus a 21.4% fall for the S&P 500, in US dollars on a total return basis.  

The proceeds of the hedges, which cost just $27m in premiums paid and commission, have been substantially redeployed ‘all at deeply discounted prices’.

The fund has added to existing investments in Agilent, Berkshire Hathaway, Hilton, Lowe’s, and Restaurant Brands, as well as making several new buys, including re-establishing a position in Starbucks. However, a cash position of about 17% is maintained.

Several holdings would appear to be strongly exposed to coronavirus lockdowns, including the top two positions at the end of February, hotel group Hilton, down 37.8% year to date, and Burger King-owner Restaurant Brands, down 40.3%.

However, Ackman reiterated his view that it is ‘critical to have a defined lockdown period for the entire country’, calling on the federal government to implement a 30-day shutdown.

‘If that happens, we can win the war against the virus and the markets and the economy will soar,’ he tweeted last week.

‘That is why we are buying stocks. These are bargains of a lifetime if we manage this crisis correctly,’ he added.

Despite the optimistic view, the manager said he expects markets, and PSH’s performance, to ‘remain volatile’ and did not rule out the possibility of high portfolio turnover or taking out further hedges.

Launched in 2015, the Guernsey-domiciled investment company delivered poor shareholder returns in its first three years but rebounded last year with a 45.6% total return. An assured navigation of the crisis could be cause for a further rerating and the London-listed shares have surged 5.9% today, meaning they are now down 4.9% for the year.

Investment company news brought to you by Citywire Financial Publishers Limited.


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