Whitney Tilson’s email to investors
6) Bill Ackman of Pershing Square Capital Management just made the greatest trade of all time (in my judgement – based on the percentage gain, dollar profit, the speed of the gain, and the perfect timing). He made almost a 100x return in less than two months, turning a $27 million investment into a $2.6 billion profit!
According to this letter he just released, earlier this year he became "extremely alarmed about both the health risks of the coronavirus and its economic impact." To hedge his portfolio, he "purchased credit default swaps (CDS) on various investment grade and high yield credit default swap indices, namely the CDX IG, CDX HY, and ITRX EUR," which "were trading near all-time tight levels of about 50 basis points per annum."
Ackman's thesis was simple:
Because we believed that the coronavirus could only be stopped in Europe and the U.S. with an unprecedented economic shutdown, based on what we learned from China, we were confident that U.S. and European credit spreads would likely widen substantially from their near-all-time lows.
In short, he saw exactly what was going to happen – and figured out the perfect way to profit from it.
Ackman has also made what I think will prove to be another brilliant move: exiting the hedge and plowing all of the gains into buying more of the stocks of the high-quality companies in his portfolio, whose stocks have all been whacked, including Berkshire Hathaway (BRK-B), Lowe's (LOW), Hilton Worldwide (HLT), Agilent Technologies (A), Restaurant Brands (QSR), and Starbucks (SBUX).
He's also investing some of his personal profits from this trade into addressing the crisis, as this article notes: Bill Ackman Puts Part of His Personal Fortune in Covid-19 Testing.
"This will enable the inevitable viral breakouts to be identified early and minimized with localized quarantines, reducing the impact on the overall U.S. economy and the need for future shutdowns," he said.
When I told my daughters about this trade over dinner recently, they asked, "Why didn't you do that, daddy?"
I had to be honest with them: "Well, Bill's a lot smarter than I am."
We should all be asking ourselves the same question. Was it really so hard to see on February 19, only 37 days ago, when the S&P hit an all-time high and credit spreads were close to all-time lows, that the coronavirus might be a big problem?
With hindsight (which is always 20/20, of course), it shouldn't have been hard to see at all, but I think we all got lulled into complacency by the long bull market...
Best regards,
Whitney
https://www.valuewalk.com/2020/03/ackmans-greatest-trade/
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