Bill Ackman Uses $27 Million CDS to Hedge and Cashes Out $2.6 Billion
In March 2020, Pershing Square bought approximately $27 million in investment-grade and high-yield credit default swaps (CDS) as insurance, clearing $2.6 billion on March 23 to increase positions in stocks that were plummeting.
At the end of February, U.S. stocks were still at high levels with very narrow credit spreads. The fund's core holdings were concentrated in Hilton, Starbucks, Lowe's, and Restaurant Brands. Ackman anticipated that lockdowns would lead to a significant pullback in his $7 billion stock portfolio, and he was unwilling to sell off his positions or bear the tax burden and timing risks of buying back later. He also rejected the idea of a short position with a capped upside of 100% and theoretically unlimited downside. Instead, he chose to buy substantial notional amounts of credit protection on CDX IG, CDX HY, and European investment-grade indices. The company publicly disclosed its hedging on March 3.
Credit spreads subsequently widened. On March 9, the contract's market value was approximately $1.8 billion, and on March 12, it was about $2.75 billion, starting to sell off in daily increments. On March 18, he called for a nationwide shutdown on CNBC, stating that without action, Hilton could go to zero and hell would come; the shareholder letter indicated that he had sold slightly over half of the notional amount at that time, realizing about $1.3 billion, with a remaining market value of about $1.3 billion, totaling approximately $2.6 billion. After the live broadcast, the hedge did not appreciate further. On March 23, everything was settled, coinciding with the Federal Reserve's announcement of large-scale liquidity support. The proceeds were used to increase positions in Agilent, Berkshire, Hilton, Lowe's, and Restaurant Brands, and to buy back Starbucks, which had been sold in January, leaving about 17% cash afterward. Timestamped records were listed from March 25 to 26. By the end of March, the fund's net asset value turned positive by about 11%.
The buying was a concentrated long position using convexity insurance to exchange cash to buy discounted core assets during the crisis; the selling was driven by public sentiment treated as a tool for panic selling. The event itself was a shareholder letter clearly outlining the building, peak, reduction, and reinvestment of positions. Beneficiaries were those who survived the liquidity drought with concentrated portfolios; those under pressure were those who misunderstood hedging as a one-sided short position.
The market traded asymmetric insurance and reinvestment, not tears from a live broadcast.
Source: Public Information
ABAB AI Insight
Ackman's strategy can be broken down into three steps: first, using cheap insurance to provide convexity for concentrated longs; as spreads widened, he reduced positions according to deteriorating risk-return, avoiding bets on systemic collapse; and converting insurance into cash to increase quality positions when others were forced to sell. CDS is not a permanent short but a portfolio insurance. The live broadcast occurred six days after the peak and after realizing half of the gains, the timeline does not support the narrative of 'crying before going short.' He simultaneously stated he was buying stocks, consistent with the subsequent list of increased positions. The controversy arises from the juxtaposition of emotions and positions, with the account detailed in the disclosures on March 3 and the shareholder letter in late March.
The capital path involves leveraging a 0.4% premium to unlock tens of times the notional protection, exploding with positive convexity as spreads widened from about 50 basis points, and then reinvesting the $2.6 billion back into the same group of leading companies. The fact that Hilton, which fell nearly 70%, was still increased in position indicates that the purpose of hedging was to preserve and expand the long position, not to change beliefs. Unlimited QE supported both credit and equity simultaneously, completing the cycle of 'insurance turning into cash and then into equity.'
Comparative subjects include buyers of CDS on subprime mortgages in 2008, Bridgewater's risk parity drawdown at the onset of the pandemic, and Buffett's cash accumulation during crises. Pershing Square is closer to a concentrated value investor temporarily borrowing macro tools. The industry position reflects hedge funds managing single strategies through derivatives, rather than becoming macro shorts.
Structural judgments pertain to the transfer of pricing power. During the crisis, pricing power shifted from book market value to those with cash. The mechanism is: equity sell-offs self-reinforce, and credit protection is cheapest at extreme spread values; those who can pay small premiums during euphoria and hand over policies to more panicked institutions during fear gain the purchasing power for the next round of equities. Tears do not change the convexity formula; the formula changes who can enter the market during a circuit breaker.
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