- Bill Ackman addressed claims that he fanned fears of the novel coronavirus to benefit his hedge fund in a letter to investors on Thursday.
- The billionaire boss of Pershing Square Capital Management — which turned $27 million in hedges into $2.6 billion during the recent market sell-off — warned of mass casualties, industries collapsing, and a deep recession in an emotional CNBC interview last week.
- However, Ackman said in the letter that the hedges didn’t post further gains from the interview.
- He also argued that he disclosed his bullish turn in sentiment and Pershing Square’s purchases of Hilton, Starbucks, and other stocks.
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Billionaire Bill Ackman defended himself in a letter to investors on Thursday, dismissing accusations that he turned $27 million in hedges into $2.6 billion by cynically stoking fears about the novel coronavirus last week in order to tank financial markets.
The Pershing Square Capital Management chief addressed the claims by detailing when and why the hedge fund made its moves. In February, it purchased credit default swaps — which insure the buyer against an asset defaulting — on investment-grade and high-yield credit default swap indexes.
Ackman noted that the investment-grade indexes were trading near their all-time tight levels, at about 50 basis points a year, and the high-yield indexes were trading close to their lowest spreads ever. Pershing bought the swaps because he expected them to rise in value as sweeping lockdowns in response to coronavirus widened credit spreads and reduced stock prices, he said.
The ensuing market sell-off did widen spreads, driving up the value of the credit default swaps to about $1.8 billion by March 9. They were worth $2.75 billion by March 12, Ackman said, prompting Pershing Square to begin selling a portion daily — they weren’t as attractive with larger spreads and accounted for almost 40% of the fund’s capital by then.
Ackman took to Twitter on March 18, calling on President Donald Trump to shut down the US and impose an “extended Spring Break” to slow the spread of coronavirus. By the time of his CNBC interview later that day, Pershing Square had sold just over half of its hedges for a $1.3 billion profit, and the balance was sold for another $1.3 billion over the next three trading days, Ackman said in the letter.
During the emotional interview, Ackman warned that failure to shut down the country would result in massive casualties, industries collapsing, and a deep recession.
“We will go through a Depression-era period in this country, and millions of people will die around the globe,” he said. “As many as a million Americans will die.”
Despite his dire warnings, Ackman argued in the letter that he didn’t mislead investors because he spoke about turning bullish and buying Hilton, Starbucks, and other stocks during the interview. He also highlighted his tweets later that day, in which he expressed confidence that the US government would lock down the nation, meaning “the markets and the economy will soar,” and Pershing Square was snapping up potential “bargains of a lifetime.”
Indeed, the fund was plowing $2.5 billion into equities at the time of Ackman’s interview, he said in the letter. He added that its hedges didn’t benefit from his appearance.
“Our hedge had already paid off prior to my going on CNBC,” he said. “The hedge did not increase in value during or after I went on CNBC. It stayed at approximately the same value until we exited.”
Ackman clarified that he was trying to convey two messages in his interview: Pershing Square was buying rather than selling, and the virus posed an enormous threat to the US that required immediate action.
“I had become bullish because of my belief that the entire country would soon go into lockdown, and that would be the fastest and best way to minimize the impact of the virus,” he said. “That was why I explained that we were buying stocks.”
“I also wanted to shout from the rooftops about the importance of taking the virus seriously so that we would build a consensus to lockdown the country as soon as possible,” he added.
Ackman also downplayed the significance of the hedges to Pershing Square’s bottom line. They only served to offset $2.6 billion in mark-to-market losses on its portfolio during the sell-off, he said.