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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 bets 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-plants 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.
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 a 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 high-flying 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,