- Bill Ackman of Pershing Square Holdings told investors Tuesday that he’s taken steps to protect the portfolio amid a volatile market induced by coronavirus panic.
- The firm’s approach has been to “acquire large notional hedges which have asymmetric payoff characteristics; that is, the risk of loss from these hedges is limited, while their potential upside is many multiples of our capital at risk,” Ackman wrote.
- The action is preferable to selling, according to Ackman’s note.
- Read more on Business Insider.
On Tuesday, Bill Ackman of Pershing Square Holdings told investors that the portfolio is being hedged to combat market volatility amid the coronavirus outbreak.
“We have taken steps to protect the portfolio from downward market volatility,” the hedge fund manager wrote. That action was taken as the firm believes “efforts to contain the coronavirus are likely to have a substantial negative impact on the U.S. and global economies, and on equity and credit markets,” he added.
The threat of a US outbreak of COVID-19, the illness the virus causes, has sent markets into a tailspin, pushing volatility up. At the end of February, markets fell into correction territory in the fastest slip since the Great Depression. Investors have also been piling into safe-haven assets amid the market rout, driving yields on long-term US Treasury bonds to record lows.
It prompted the Federal Reserve to issue an emergency interest rate cut of 50 basis points Tuesday to protect the economy from damage. But markets still fell, rebounding Wednesday only after former vice president and 2020 candidate Joe Biden had a successful Super Tuesday. Early Thursday, stocks are again poised for declines.
Pershing Square Holdings’ approach to the market climate has been to “acquire large notional hedges which have asymmetric payoff characteristics; that is, the risk of loss from these hedges is limited, while their potential upside is many multiples of our capital at risk,” Ackman wrote. He did not give any specific details of the hedges or the timing of increases or decreases in the portfolio.
And, while the hedges are set to protect the portfolio from losses in a severe market decline, they will also somewhat “reduce the portfolio’s upside potential if there is a minimal economic or market impact from the virus,” he said.
Still, Ackman said that the firm’s approach is “preferable to that of selling our portfolio of high quality, conservatively financed companies whose long-term intrinsic value is not likely to be materially affected by coronavirus developments.”
Pershing Square Holdings delivered a 58% return in 2019, outperforming the greater market by a landslide following three years of negative returns. The rebound came after Ackman honed his long positions, exiting chemical and business service companies, and betting big on Warren Buffett – at the end of December, Ackman held roughly 4 million Berkshire Hathaway B-shares worth about $555 million, according to GuruFocus data.