When Bill Ackman, the billionaire investor and the guiding hand behind presently wildly profitable and often unpopular hedge fund Pershing Square, bet against the markets in March 2020, he was sharply criticized for essentially "betting on" the novel coronavirus COVID-19 to wreck the markets. Turns out, Ackman made a good call – not that he's getting any praise for it.
Last month, Pershing Square posted an 11.1 percent net gain after spending $27 million on credit default swaps (CDS), a move that insures buyers against assets defaulting. The hedges shot upward in value to $2.6 billion after markets plunged last month. Ackman noted that this gain "roughly offset" the fund's losses on its equity portfolio .
Although Ackman's investors might be breathing a sign of relief, his colleagues and critics hastily accused him of manipulating the markets into a downturn when he predicted mass casualties, the collapse of industry, and a "deep recession" during the course of an interview on CNBC.
"I have received a fair bit of criticism over the last few days from some who have claimed that I and our investors have profited from the Covid-19 crisis.... I invest capital on behalf of 1,000s of investors through a public company called Pershing Square Holdings...[and] our first priority is to protect our investors from losing their money," Ackman responded in a letter to investors and a series of public tweets.
He continued that he believed the best way to mitigate the risks from the coronavirus to his investors' funds was to purchase CDS policies on many of the fund's investments, including consumer businesses like restaurants, retail operations, and hotels. "Because the writers of the policies were not concerned about the risks we had identified, these policies were very cheap," Ackman continued.
"Unfortunately, our predictions came to pass, and our portfolio of stocks declined by about 30%. Fortunately, our insurance policies increased in value by the same amount so we cashed them in."
Don't Allow Vilification to Slow Your Responsible, Sustainable Investing
Ackman went on to note that after cashing in the CDS policies, Pershing Square reinvested $500 million of its capital into "one of the largest real estate development companies in the U.S., with the capital it needs to continue its various development projects which will create 1,000s of construction and other jobs...[that] will help the economy recover." He also cited current events as evidence that the dire warnings in his interview were nothing short of accurate predictions about what would happen if the president failed to shut the borders and "lockdown the entire country."
Self-directed investors should take away two things from Ackman and Pershing Square, whether you like the hedge fund and its manager on a personal level or not.
First of all, when you protect your assets in advance while others fail to do so, you probably will be vilified. Accept this.
You should always do the right thing for your capital and the capital for which you are responsible. Ackman has a reputation for being a bit of a loose cannon, so some might argue this will not bother him. In many cases, however, investors managing their retirement accounts will actually opt away from mitigating risk in their portfolios if they believe it will make them "look bad" or if they think they will be criticized or mocked for the move. Do not allow others' perception of you to dictate your financial future. Make the moves that will protect your capital and your financial security and freedom.
Second of all, notice where Ackman put $500 million of those returns: real estate.
Nearly every economist agrees that the housing market and the real estate market will suffer less and recover sooner than other sectors once the coronavirus outbreak is contained or resolved. In this time of uncertainty in the markets and in other industry sectors, real estate and real estate-related assets remain simple, safe, and strong in your portfolio.
Are you locking down your portfolio and liquidating assets, or are you investing in today's markets? Why?
Thank you for reading Self-Directed Investor Magazine!
Your comments and questions are welcomed below.