Inside the Greatest Trade of All Time—and What Bill Ackman Is Investing in Now

Photograph by Benedict Evans

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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 bet 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-plant 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.

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In July, as Barron’s noted in a recent cover story, Ackman rode the cresting wave for special purpose acquisition companies, or SPACs, by raising $4 billion, the largest SPAC initial public offering of 2020 and one of the largest IPOs of the year. (In typical Ackman fashion, he also tried—and failed—to use the SPAC to buy Airbnb and Stripe. Another perfect fit for his SPAC, from his perspective, would be Bloomberg.)

“

It will not be a fun period in American history, where people feel like the election was stolen from them one way or another. ”

— Bill Ackman

Though he sees opportunities in the market, Ackman is getting worried again about the macro picture. He thinks we’re in for another spike of Covid-19 cases as colder weather sets in. “The bad news is you’re going to start to see infection rates starting to increase,” he says. On the other hand, there will probably be therapeutics and vaccines to help slow the infection and death rates in the next three to six months. “Those will be the countervailing forces, with the general trend being in favor of putting this behind us,” he adds.

Ackman is more worried about volatility in the financial markets related to the outcome of a close presidential election, if, say, Donald Trump appears to win on election night but Joe Biden wins when mail-in ballots are counted weeks later. “It will not be a fun period in American history, where people feel like the election was stolen from them one way or another,” he says.

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 the 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 highflying 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, Citigroup, and Goldman Sachs could find a principal willing to quote him the protection in $5 billion increments. His agents told the market that a “nontraditional account” was buying. That characterization of Pershing Square was a little misleading, but it was true that Ackman had not bought any CDS since before the 2008 financial crisis. He says that the sellers of the insurance—he thinks they included funds managed by BlackRock and Bridgewater, the huge hedge fund run by Ray Dalio—must have thought, “This trade is only ratcheting in…and some stupid guy who doesn’t know [expletive] about CDS has come into our market and is buying like crazy.” (Bridgewater and BlackRock declined to comment.) Ackman and his partners debated the idea of selling stocks, but instead made the hedge bigger. He concluded that the risk was asymmetrical: lots of upside for little cost.

After a week of buying protection, Ackman had accumulated $51 billion of notional protection on the U.S. investment-grade bond index, $18 billion of protection on the European investment-grade bond index, and $2.5 billion of protection on the U.S. high-yield bond index. He says that he owned 26% of the investment-grade bond index at one point. “Imagine someone buying 26% of the S&P 500,” he says with pride. He committed to spending $500 million in annual premiums. But he figured that the hedge would be unwound in 90 days, max, and would cost $125 million. “We viewed this as a trade,” he says, “not a fundamental bet.” He didn’t think that investment-grade companies were going to default en masse. Rather, he assumed that the spreads between Treasury bonds and corporate bonds would widen. Either way, it was a massive notional bet that investors would panic because of the economic implications of the spreading virus, and that he would benefit when they did.

Barely a week after he had put the hedges on, Ackman’s bet began to pay off in a big way. Spreads were blowing out, just as he’d hoped. By March 9, his CDS portfolio was worth $1.8 billion; three days later, it was $2.75 billion. “I’m thinking, ‘Wow, unbelievable!’ ” he says.

But the market was increasingly volatile. On March 9, the Dow plummeted 2,103 points; the next day, the index leapt 1,167 points. The value of Ackman’s hedge was bouncing around, too. “Our hedge goes from being $2.7 billion to losing $800 million of its value,” he says. “It goes to being worth $1.9 billion.” Now he had a new challenge. “The problem with putting on something of huge size,” Ackman says, is that “you have to take it off.”

The boffo CDS position suddenly made up 40% of his portfolio. It was too much volatility even for a fearless hedge fund manager. “It wasn’t risky when we put it on,” he said. “But it becomes very risky, in a sense, now that it’s a 40% position. In a week, it became worth $2.7 billion. And in a week, it can go back to zero.”

By the second week of March, Ackman says, Trump was taking the virus more seriously. He predicted that Treasury Secretary Steve Mnuchin and Jerome Powell, chairman of the Federal Reserve, were going to take substantial action to protect the capital markets. “We’re not going to have a financial crisis like the last time,” Ackman figured. “Would I rather have 40% of the portfolio in something that could go to zero if the government does the right thing?” he asked himself. “Or would I rather sell that whole thing and buy stocks at hugely discounted prices?” Three weeks in, he decided to lock in his gains. He had spent barely $27 million on the insurance premiums, “and it went for $2.7 billion. Then we decided to get out. We sold as quickly as we could.”

Easier said than done. “We’ve got to take the CDS trade off without moving the market,” he says, “and everyone in the market knows how much protection we bought, or they think they know. That’s a dangerous place to be.”

On March 18, Ackman appeared on CNBC. At that point, Pershing Square had sold half of the CDS position and plowed $2.1 billion—some of his profits to that point, plus $800 million cash on hand—back into the stock market. Ackman says he would have sold the entire CDS position on March 12, if he could have. But just as it took time to put the position on, it took seven or eight days to unwind it.

“

In a week, it became worth $2.7 billion. And in a week, it can go back to zero. ”

— Bill Ackman

His 28-minute CNBC appearance caused a firestorm. He says that his intention was to send a “very bullish message.” It wasn’t received that way. “I said, ‘Look, we’re at a fork in the road. One path leads to death and destruction and hell is coming. That’s if we do nothing about the virus and it runs roughshod over the country, and we’re in a rolling 18-month disaster and no company can survive. Or we do a hard shutdown of the country for 30 days, but we’re out of the soup in a very short period of time. We can reopen the economy. Everyone’s got to wear masks. I’m very confident the government is going to do the right thing, and that’s why I’m buying stocks today.’ ”

Instead of calming people, Ackman’s comments scared the bejeezus out of viewers. The Dow, down 6.5% for the day when he started talking, was down 10% when he finished. CNBC played the clip of his most alarming comments over and over again. People thought that Ackman was talking the market down to increase the value of his CDS hedges. In fact, he had already unwound half of the hedge and had been buying stocks in a big way. He says his portfolio lost money that day.

The CNBC fiasco aside, Ackman is understandably ecstatic about the trade. He says his “timing was impeccable” in the execution and the successful unwind of the trade three weeks later. “We got out of 26% of the [investment grade] index without moving the market at all,” he says. Even Dan Loeb, his occasional hedge fund nemesis, tipped his hat. “He found a great asymmetric way to hedge market risk at a very low cost,” Loeb tells Barron’s. “He nailed it in terms of his timing.”

Ackman is once again completely long the market. “We have no hedges on,” he says. He remains bullish and maintains high conviction on his holdings. “For the 10 that we own, I think they’ll all be meaningfully higher a year from now,” he says. He regrets selling that 5% stake in Chipotle in March at $900. The shares are more than $1,200 now. “It’s got an amazing digital offering, and a huge percent of their customers went [to] digital delivery, and they’re not losing those customers as the stores reopen for in-house dining and pickup,” he explains. He held on to Lowe’s, which he says is a “huge beneficiary” of the pandemic-inspired home-improvement craze. Another holding is Agilent, the maker of scientific equipment, which has improved its operating margins without layoffs or furloughs, he says, suggesting to him that the current valuation of the company “does not give sufficient recognition to the company’s high-quality business model.”

Ackman bought, and then sold, Berkshire Hathaway (BRK.A). He was waiting for Buffett to deploy some of his $150 billion cash pile after the market crashed in March. But that didn’t happen until the market had nearly fully recovered. He remains in awe of Buffett but decided that he wants to invest his cash himself. Ackman also bought, and quickly sold, Alphabet (GOOGL) stock for only a small profit. “Stupid,” he says.

Aside from Ackman himself, the beneficiaries of his recent investing prowess include teacher pension funds in Texas and Arkansas, clients of EnTrust Global, the second-largest holder of Ackman’s Pershing Square Holdings. Unions representing bakers and pipe fitters also have exposure to Ackman. As Barron’s has written, individual investors can invest with Ackman via Pershing Square Holdings (PSH.Netherlands), an overseas closed-end fund available to U.S. investors.

There’s no re-creating the March trade. The cost of insurance is too high now. Instead, “we’re keeping a pile of cash around,” Ackman says. He has his shiny, new $4 billion SPAC—and he’s on the prowl. And he has his portfolio of what he considers “super-high-quality businesses that are reasonably insulated from what’s going on in the world.”

In fact, Ackman recognizes that their outsize success is an unfortunate consequence of our new, grim, reality: “If you own super-resilient businesses, they’re going to do better than they would have had there been no crisis,” he says. “The stock market represents the strength of the best and most dominant, best-capitalized companies, and the stock market that doesn’t exist is a market of private, family-owned mom-and-pop stores, and that’s the decimated part of America right now.”