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The Thesis
Ackman saw COVID-19 spreading globally and realized credit markets were not pricing in the economic devastation a pandemic would cause, buying cheap credit protection.
The Story
In late February 2020, as COVID-19 was spreading from China to Europe but before Western markets had reacted, Bill Ackman's Pershing Square spent approximately $27 million purchasing credit default swaps on investment-grade and high-yield bond indices. Ackman recognized that a global pandemic would cause unprecedented economic disruption, and credit spreads — the premium investors demand for default risk — were still near historic lows. The asymmetry was extraordinary: the hedges could lose $27 million at most but could pay off enormously.
In March 2020, as markets cratered and credit spreads blew out, Ackman unwound the hedge for approximately $2.6 billion — a nearly 100x return in roughly 30 days. He then immediately redeployed the profits, buying stocks like Hilton, Starbucks, and Lowe's at their panic lows. This "hedge into buying opportunity" strategy turned what could have been a devastating quarter into one of the greatest trading performances of all time. Ackman was transparent about every step, even going on CNBC to explain his thesis in real time.
Key Insight
When the cost of insurance is cheap and the risk is asymmetrically large, the rational move is to buy protection — then use the profits to buy the dip.
“The key to success is to risk only what you can comfortably afford to lose.”
Bill Ackman
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