The billionaire hedge fund investor Bill Ackman has been quite successful throughout his career.
Since Ackman launched his main fund, Pershing Square Capital Management, in 2004, Pershing has generated a roughly 17% annualized return versus 10.2% for the broader benchmark S&P 500 index.
The impressive results and Ackman's superb career have been made possible by several big investment ideas over the last 14 years that made Ackman and Pershing a fortune. Let's take a look at the top three.
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1. The COVID play
Right before COVID really brought down the economy in March 2020, Bill Ackman foresaw the chaos the virus could cause and its ability to bring down the market. "Hell is coming," Ackman warned just weeks ahead of the market meltdown.
Ackman's warning turned out to be true, and the billionaire also put his money where his mouth was. In the weeks leading up to the first wave of lockdowns and the big market decline, Pershing purchased large amounts of credit protection, a type of notional hedge, on different kinds of global investment-grade and high-yield credit indices that perform well when the market struggles. Pershing paid $27 million on the premiums and commissions of the hedges and would go on to yield $2.6 billion in profits.
Ackman said he saw an asymmetric opportunity because he managed to obtain the notional hedges when credit spreads were near all-time tight levels, making the risk on the bet very low. He would end up investing much of the proceeds in stocks that fell significantly during the early months of the pandemic, but that he believed would ultimately rebound.
2. Shorting subprime mortgage exposure
As most know, a small select group of investors essentially shorted the housing market before it blew up during the Great Recession. Ackman was one of those investors.
At the time, Ackman was running a fund called Gotham Partners, which he founded with his former Harvard classmate David Berkowitz in 1992. In 2002, Gotham made a large bet against the municipal bond insurance company MBIA(NYSE: MBI) through a leveraged short position and by purchasing credit default swaps on MBIA debt, which is basically an insurance policy on the company's failure.
Ackman and Gotham believed that MBIA had too much exposure to subprime mortgages and was not operating within the law in regard to some of its trading activities. They were early but maintained their position until the Great Recession and ended up closing it out in 2009 for a total sum of $1.4 billion.
3. Buying bankrupt commercial real estate
Ackman didn't just go short during the Great Recession; he also found long opportunities after the crash as well. One of those was the real estate investment trust (REIT) General Growth Properties, one of the largest owners of shopping malls, which got acquired by another REIT in 2018 called Brookfield Property Partners, a subsidiary of Brookfield Asset Management.
In 2009, General Growth Properties filed for bankruptcy after it couldn't refinance $27 billion in debt following the breakdown of the commercial mortgage-backed securities market. Pershing Square was part of an investor group that helped recapitalize the company and bring it out of bankruptcy.
In 2014, after the company and mall industry in the U.S. had recovered, Ackman sold more than $1 billion worth of shares and said the investment "turned $60 million into $1.6 billion."
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