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Bill Ackman Betting Lightning Strikes Twice


mattee2264
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https://www.ft.com/content/9697c211-c631-49b6-a91e-ae290fb02c3a

 

Bill Ackman hedging his equity exposure via corporate debt again. Not on the same scale as earlier this year but interesting to read that he is able to get similar terms indicating there is some complacency now that a viable vaccine has been developed. Interesting positioning considering that everyone is piling into equity rotation plays such as financials, energy, travel etc.

 

I agree with his assessment there will be a robust recovery but the next few months will be challenging and perhaps like the summer re-opening fever there will be a pullback as hopes and dreams collide with economic reality. But the difference this time is that there is light at the end of the tunnel which might allow the market to see past a few tough winter months and waiting for a pullback will likely therefore mean paying much higher prices for recovery plays.

 

Thoughts?

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I think this has more to do with the degree to which corporate credit has tightened and asymmetry than anything.

 

CDX IG is at 50 bps. Meaning one can pay 50 bps / year for 5 year to buy default insurance on a basket of 125 investment grade credits.

 

Pre-covid this number was 40 bps. The risk in investment grade credit has increased by more than 10 bps. The lowest they've been in 10 years is 45 bps.

 

During the march sell-off this blew out to 160 bp. Ackman's hedges were on US and European investment grade credit primarily, on $70 billion of notional. this time around it's "less than 1/3" the size. Let's say it's $20 billion.

 

So he's probably paying about $100mm / year to get short $20 billion of investment grade credit. If spreads widened to 100 (for context they widened to 93 in december 2018 on general fears of rising rates/end of QE),  he'd make ~2.5 points on the notional or $500mm.

 

This is in the context of a ~$11 billion of AUM.

 

He's fighting the fed, but even if he's wrong he has permanent capital and the cost of carry is not huge at his current size.

 

As a PSH shareholder, I approve. I cannot put this on as I don't have ISDA's with banks lol. I would short IG at 50 bps if i could. I also think this is a good hedge to rising interest rates w/o the ZIRP/NIRP tail risk and with far better/empirically observed negative correlation to equities than shorting treasuries/rates. Corporate credit quality will deteriorate if the all-in cost of financing increases (see late 2018 widening).

 

he may even be shorting HY at 330. HY is at an all time low absolute yield (in the low 4% range) and very low absolute spreads given the default environment.

 

I continue to think investing in Ackman at a 30% discount is very attractive.

 

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I'm not into hedges and shorts, but I've been intrigued for a long time by shorting HY as portfolio insurance (luckily, I've been too dumb to get much further than that and levered up instead...). Anyway, it seems like cheap insurance and with less downside than say a broad equity market short, and when things crack, illiquid HY also gets punched in the face. Any ideas for a cheap way to express that view? Perhaps just short a liquid HY ETF?

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I think this has more to do with the degree to which corporate credit has tightened and asymmetry than anything.

 

CDX IG is at 50 bps. Meaning one can pay 50 bps / year for 5 year to buy default insurance on a basket of 125 investment grade credits.

 

Pre-covid this number was 40 bps. The risk in investment grade credit has increased by more than 10 bps. The lowest they've been in 10 years is 45 bps.

 

During the march sell-off this blew out to 160 bp. Ackman's hedges were on US and European investment grade credit primarily, on $70 billion of notional. this time around it's "less than 1/3" the size. Let's say it's $20 billion.

 

So he's probably paying about $100mm / year to get short $20 billion of investment grade credit. If spreads widened to 100 (for context they widened to 93 in december 2018 on general fears of rising rates/end of QE),  he'd make ~2.5 points on the notional or $500mm.

 

This is in the context of a ~$11 billion of AUM.

 

He's fighting the fed, but even if he's wrong he has permanent capital and the cost of carry is not huge at his current size.

 

As a PSH shareholder, I approve. I cannot put this on as I don't have ISDA's with banks lol. I would short IG at 50 bps if i could. I also think this is a good hedge to rising interest rates w/o the ZIRP/NIRP tail risk and with far better/empirically observed negative correlation to equities than shorting treasuries/rates. Corporate credit quality will deteriorate if the all-in cost of financing increases (see late 2018 widening).

 

he may even be shorting HY at 330. HY is at an all time low absolute yield (in the low 4% range) and very low absolute spreads given the default environment.

 

I continue to think investing in Ackman at a 30% discount is very attractive.

 

Pupil,

 

You give these analysis out for free?  Have you consider a substack (whatever that is)?

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As a PSH shareholder, I approve. I cannot put this on as I don't have ISDA's with banks lol. I would short IG at 50 bps if i could. I also think this is a good hedge to rising interest rates w/o the ZIRP/NIRP tail risk and with far better/empirically observed negative correlation to equities than shorting treasuries/rates. Corporate credit quality will deteriorate if the all-in cost of financing increases (see late 2018 widening).

 

he may even be shorting HY at 330. HY is at an all time low absolute yield (in the low 4% range) and very low absolute spreads given the default environment.

 

I continue to think investing in Ackman at a 30% discount is very attractive.

 

Why don't you buy puts on LQD or HYG?

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Ive been adding a few VIX calls the past few days, but expect it to be money written off. The biggest difference to me, is that last time Ackman kept his mouth shut. This time he's being promotional about it. If think we can infer what he's trying to do.

 

I am a little dense, please explain Greg?  See you on the GRIF in half an hour?

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Ive been adding a few VIX calls the past few days, but expect it to be money written off. The biggest difference to me, is that last time Ackman kept his mouth shut. This time he's being promotional about it. If think we can infer what he's trying to do.

 

I am a little dense, please explain Greg?  See you on the GRIF in half an hour?

 

With many money managers, if they find a real cant miss trade they tend to be hush hush about it, exactly as Bill was the first time. Then there's the other type of trades where guys tend to make a lot of noise, hoping to perhaps create a bit of their own alpha.

 

See you on GRIF!

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the FT article makes it appear that this is just covid 2.0 for ackman, which is a little surprising given the recent promising vaccine news.  but I would think there is some foreign policy risk over next few months...if I were china and wanted to do a full takeover of Hong Kong, as an example, I would do it early 2021.  Putin may do something similar.  no more trump, biden weak and just settling in. so VIX may get vexatious.

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As a PSH shareholder, I approve. I cannot put this on as I don't have ISDA's with banks lol. I would short IG at 50 bps if i could. I also think this is a good hedge to rising interest rates w/o the ZIRP/NIRP tail risk and with far better/empirically observed negative correlation to equities than shorting treasuries/rates. Corporate credit quality will deteriorate if the all-in cost of financing increases (see late 2018 widening).

 

he may even be shorting HY at 330. HY is at an all time low absolute yield (in the low 4% range) and very low absolute spreads given the default environment.

 

I continue to think investing in Ackman at a 30% discount is very attractive.

 

Why don't you buy puts on LQD or HYG?

 

You probably could. Benefits would be no margin requirements, finite/manageable losses, and non-recourse leverage.

 

Downsides are that it costs way more than 0.5% annually for ATM exposure, you're probably getting slightly less leverage (estimated 10-20x leverage in CDX pending margin requirements), and significantly less liquidity with wide bid/asks.

 

 

 

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Yeah I had the same thought: that a vaccine makes further lockdowns more likely as governments can justify buying time.

 

I don't really get US politics. But my understanding was that lockdown decisions were up to the mayors rather than the President or the President Elect. So does what Biden's coronavirus advisor thinks really carry much weight?

 

Using another lockdown as an excuse to get the massive stimulus they wanted is a bit sneaky though.

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Yeah I had the same thought: that a vaccine makes further lockdowns more likely as governments can justify buying time.

 

I don't really get US politics. But my understanding was that lockdown decisions were up to the mayors rather than the President or the President Elect. So does what Biden's coronavirus advisor thinks really carry much weight?

 

Using another lockdown as an excuse to get the massive stimulus they wanted is a bit sneaky though.

 

there should be a difference between politics and the rule of law. problem is that Ds dont know the difference. rule of law says that states retain "police power" over the health/safety of state citizens. hence governors decide on lockdowns for health reasons within their states.  now, federal govt can through the commerce clause of US Constitution enter this field reserved for state action...but not by fiat of some federal bureaucrat...or even by POTUS...requires federal law enacted.  there has been no federal law enacted to permit Biden to declare a national lockdown (or even a national mask requirement that carries penalties). 

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I don't think there is the political will for another nationwide lockdown - especially if a vaccine is on the horizon.

 

Not locking means the bulk of the cost is borne by those marginal individuals who die - and dead people don't vote (insert joke here). There is unlikely to be lasting and long-term consumer behavior change since the vaccine hope is still alive and the impact to businesses from accelerating case counts is moderate.

 

If there was no vaccine, and no hope of one, and the exponential growth curve is getting out of hand, lockdowns become way more likely because the cost of not doing them isn't measured in tens of thousands lives and moderate economic losses, but rather hundreds of thousands of lives and significant economic shocks as the fear of doing anything outweighs the impulse for discretionary spending.

 

I think it's clear which if these two scenarios politicians will lean towards as long as a vaccine is on the horizon.

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not so if this guy is in charge.. he is in one of Biden's advisors  ???

 

 

https://www.cnbc.com/2020/11/11/biden-covid-advisor-says-us-lockdown-of-4-to-6-weeks-could-control-pandemic-and-revive-economy.html

 

He said the government could borrow enough money to pay for a package that would cover lost income for individuals and governments during a shutdown.

 

“We could pay for a package right now to cover all of the wages, lost wages for individual workers for losses to small companies to medium-sized companies or city, state, county governments. We could do all of that,” he said. “If we did that, then we could lockdown for four-to-six weeks.”

 

“The problem with the March-to-May lockdown was that it was not uniformly stringent across the country. For example, Minnesota deemed 78 percent of its workers essential,” they wrote in the New York Times. “To be effective, the lockdown has to be as comprehensive and strict as possible.”

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not so if this guy is in charge.. he is in one of Biden's advisors  ???

 

 

https://www.cnbc.com/2020/11/11/biden-covid-advisor-says-us-lockdown-of-4-to-6-weeks-could-control-pandemic-and-revive-economy.html

 

He said the government could borrow enough money to pay for a package that would cover lost income for individuals and governments during a shutdown.

 

“We could pay for a package right now to cover all of the wages, lost wages for individual workers for losses to small companies to medium-sized companies or city, state, county governments. We could do all of that,” he said. “If we did that, then we could lockdown for four-to-six weeks.”

 

“The problem with the March-to-May lockdown was that it was not uniformly stringent across the country. For example, Minnesota deemed 78 percent of its workers essential,” they wrote in the New York Times. “To be effective, the lockdown has to be as comprehensive and strict as possible.”

 

Well he's not in charge and he's not a politician. He has little skin in the game. Like I said, I don't think there's the political will for nationwide lockdowns particularly if a quick fix like a vaccine is around the corner. The politicians will seem the increase in mortality a worthwhile sacrifice to avoid another lockdown.

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Surely a quick fix around the corner makes lockdowns more palatable? Lockdowns function as a circuit breaker and stop cases getting out of control and overwhelming the health care system. Social restrictions have limited effectiveness because people break the rules or bend the rules. For example in the UK when we imposed 10pm curfews people started drinking earlier and then after 10pm crowded onto the streets.

 

And lack of political will for national lockdowns increases the chances cases will get out of control. The European approach was pre-emptive lockdowns and while that wasn't popular it has already flattened the curve at quite low case numbers. Delayed action may increase the chances of avoiding lockdown but it also increases the risk of cases getting out of control and longer lockdowns being needed.

 

As we saw already during the first wave complacency is the virus's friend and I think that is Ackman's point here and why he is hedging against a remote but very serious worst case scenario.

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I think the only way an average investor could replicate this hedge is HYG or LQD ETF put options. You could buy an OTM put on LQD Dec 2021 at $120 for .11 cents. LQD fell to $105 in March so the return would be $15/.11 or 136x your investment. Seems expensive compared to Bill buying IG CDX for 50 bps a year.  It would cost 70 bps/month for us (1/136).

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I think the only way an average investor could replicate this hedge is HYG or LQD ETF put options. You could buy an OTM put on LQD Dec 2021 at $120 for .11 cents. LQD fell to $105 in March so the return would be $15/.11 or 136x your investment. Seems expensive compared to Bill buying IG CDX for 50 bps a year.  It would cost 70 bps/month for us (1/136).

 

70 basis points for the duration (13 months), not the month, no?

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I think the only way an average investor could replicate this hedge is HYG or LQD ETF put options. You could buy an OTM put on LQD Dec 2021 at $120 for .11 cents. LQD fell to $105 in March so the return would be $15/.11 or 136x your investment. Seems expensive compared to Bill buying IG CDX for 50 bps a year.  It would cost 70 bps/month for us (1/136).

 

70 basis points for the duration (13 months), not the month, no?

 

70 Bo's would be the cost for the entire duration. Ackman is paying 0.50% for the year and us a little more with that bet.

 

The difference is you're really only hedging for drops in excess of 12% since LQD currently trades @ $136. The whole ride down from $136 to $120 is unprotected (depending on timing/speed/etc of the drop.). Bill's bet would be paying out the entire time AND still be cheaper while the option holders risks riding out a 10% decline and still losing their principal. These institutional guys get access to superior products than us average Joe's.

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Sorry meant to say 11 cents for LQD 120 puts expiring in December 2020 so 1 month (not December 2021). So the cost to hedge would be 70 bps/month and only protected below 120 so this would be a tail bet in case of another March/April type period. That is very expensive compared to what Ackman can do.

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