How bill ackman made $2 billion betting against the market during COVID-19

Bill Ackman, through his hedge fund Pershing Square Capital Management, generated approximately $2.6 billion in profits during the COVID-19 market turmoil by strategically using credit default swaps (CDS) and timing market movements. Here’s a breakdown of how he achieved this:

Key Steps in Ackman’s Strategy:

1. Anticipating Economic Impact: In February 2020, Ackman recognized the potential severity of COVID-19 and its economic repercussions, particularly on corporate credit markets. He predicted widespread business closures, market panic, and a credit crunch.

2. Credit Default Swaps (CDS) Trade: Instrument: Ackman purchased CDS contracts on investment-grade corporate bond indices (e.g., CDX and iTraxx). These derivatives act as insurance against defaults, with payouts tied to credit spreads.

Mechanics: As the pandemic escalated, fear of corporate defaults surged, causing CDS spreads (the cost of insurance) to widen dramatically. For example, spreads on the CDX investment-grade index spiked from ~50 basis points in early 2020 to over 150 basis points by March.

Ackman’s team bought these CDS contracts at low prices and sold them after spreads widened, realizing profits from the increased value of the contracts.

3. Timing the Fed Intervention: Ackman closed the CDS positions in late March 2020, just after the Federal Reserve announced unprecedented stimulus measures, including corporate bond purchases. This intervention stabilized credit markets, causing spreads to tighten rapidly.

The trade lasted about a month, netting 2.6billion in profits 27 million initial investment—a nearly 100x return due to leverage inherent in CDS.

4. Reinvestment in Equities: After exiting the CDS trade, Ackman deployed proceeds into undervalued stocks (e.g., Hilton, Restaurant Brands International, and Warren Buffett’s Berkshire Hathaway) as markets bottomed out. This “long” strategy capitalized on post-crash recoveries.

Why It Worked:

• Leverage: CDS require minimal upfront capital relative to their notional value, amplifying gains from spread movements.
• Market Panic vs. Actual Defaults: Profits stemmed from increased fear (spread widening), not actual defaults. The Fed’s actions averted a wave of defaults, allowing Ackman to exit before the CDS would have expired worthless.
• Public Advocacy: Ackman’s high-profile CNBC interviews in March 2020, where he urged lockdowns and expressed bearish views, coincided with his exit from the trade, maximizing media impact.

Outcome:

• Pershing Square gained 27% net returns in 2020, driven largely by this trade.
• The strategy exemplified a “hedge and pivot” approach: profiting from downside protection, then capitalizing on market rebounds.

Risks & Criticism:

• Timing Risk: Exiting too early or late could have drastically altered outcomes. The Fed’s swift response was critical.
• Ethical Debates: Some criticized Ackman for profiting from a crisis, though he framed his actions as a necessary hedge to protect his fund.

In summary, Ackman’s $2.6 billion gain was a masterclass in crisis-driven derivatives trading, combining macroeconomic insight, precise timing, and leverage. His ability to pivot from short-term hedging to long-term value investing underscored his adaptive strategy during unprecedented volatility.