“Hell is coming,” the billionaire hedge fund manager Bill Ackman told millions of Americans in a 28-minute near-hysterical TV interview 10 days ago. He said the US was underestimating the severity of the coronavirus crisis. It would kill millions of people and devastate the global economy, he said.
At the same time Ackman, a well-known Harvard-educated hedge fund manager, had quietly placed a bet that stock markets would tank. Those bets made his hedge fund $2.6bn (£2.2bn) – a near-10,000% return on his $27m stake.
Ackman’s extraordinary doom-laden appearance on CNBC, in which he revealed he had evacuated his family and colleagues from New York City and said he expected the virus to kill close to a million Americans, spooked financial markets, sparking immediate frenzied selling.
As he spoke, the Dow Jones industrial average index, which was already down 1,000 points that day, collapsed further, triggering “circuit breakers” designed to halt extreme turmoil, and the market closed for 15 minutes. When it reopened, it was down more than 2,000 points.
It lead Forbes magazine to report: “The billionaire interview that tanked the stock market”.
Ackman, the founder and chief executive of the hedge fund Pershing Square Capital Management, also addressed Donald Trump on Twitter, saying: “Mr. President, the only answer is to shut down the country for the next 30 days and close the borders. Until a vaccine is manufactured, distributed and injected, we will go through a depression-era period in the country.”
He added: “Millions of people are going to die around the globe and as many as a million Americans, it’s just math.”
The emotional call-in interview, in which Ackman said he worried the virus could kill his elderly father and also bring about to the collapse of some of America’s biggest companies, puzzled financial experts and commentators because Ackman said he was not selling stakes in the companies that his hedge fund owned. In fact, he told viewers, he was buying up bigger stakes in the very companies he warned would fail.
Previous stock market lows
28 October 1929 The original Black Monday. The Dow plunged 13%, then a record, as the Great Wall Street Crash ended the bull market of the 1920s.
29 October 1929 The Dow plunged 12% amid a second day of panic selling, wiping out investors who had borrowed money to buy stocks.
19 October 1987 Wall Street’s worst day ever saw 22.6% wiped off the Dow, sparked by worries about the US economy and fuelled by new automatic trading programmes.
14 April 2000 The Nasdaq index plunged by 9% as the dotcom bubble burst, sending tech stocks down 25% in a single week.
17 September 2001 After 9/11, Wall Street remained closed until 17 September 2001, the longest shutdown since 1933. The Dow fell 7.1% or 685 points on that first trading day, with airlines and insurers leading the rout.and there were more steep losses in the days that followed. Among the biggest fallers were companies in the airline and insurance sectors.
15 July 2002 The FTSE 100 tumbled 5.4%, its worst daily loss during a poor year dominated by fears of war on Iraq, tensions in North Korea, and economic stagnation
10 October 2008 The collapse of Lehman Brothers in September 2008 triggered an autumn of wild plunges, with Britain’s FTSE 100 shedding 8.8% in a single session, its worst day after the 1987 crash.
22 September 2011 The FTSE 100 fell 4.6% as markets wobbled during the summer, hit by fears of a new global recession and the Greek debt crisis.
24 August 2015 The FTSE fell 4.7% or 289 points, wiping more than £70bn off the value of London-listed companies, amid a wider global sell-off, prompted by fears about the health of China’s economy.
9 March 2020 Fears of a global recession triggered by the coronavirus, and the launch of an oil price war, hit global markets. The FTSE 100 plunged 7.7% , pushing it into an official bear market.
Hedge fund managers have been known to spark fear in the markets to drive down the share price in companies in which they have short positions (bets against), but Ackman said he was buying up shares because they were the “bargains of a lifetime”.
Stephanie Ruhle, a banker turned business correspondent on the rival channel MSNBC, criticised Ackman for his “wildly irresponsible” diatribe. “In putting on that grand show while he was getting choked up talking about his father, he caused the markets to puke and he caused the circuit breakers to trigger” she said.
Ruhle said it was perplexing that Ackman would make such a public performance of his fears when as a very well respected, rich and connected hedge fund boss, he could raise his concerns directly with Trump rather than grandstanding on TV and social media.
“Make no mistake, Bill Ackman could call the White House any day of the week,” she said. “I assure you, Jared Kushner [Trump’s senior adviser and son-in-law] would love to take his call. But what has so many people wondering tonight, [is] why Bill Ackman, who maybe has the right idea, or very good intentions, would put on such a ridiculous show and cause such damage to an already panicked market. That’s what’s puzzling.”
The puzzle appeared to have been solved this week when Ackman revealed in a letter to his shareholders that since late February he had been buying “credit protection” hedges – bets that the markets would fall.
Those hedges have paid off and Ackman’s fund used the gains to buy shares in “companies we love at bargain prices”.
While people around the world have been watching their savings shrivel, and 3 million Americans lost their jobs last week alone, Ackman’s deals made him and his shareholders $2.6bn.
Ackman was already rich. His net worth before the crisis was estimated by Forbes at about $1.3bn. The son of the boss of one of New York’s premier real estate financing firms, Ackman has inherited a love for luxury property. He splits his time between a $22m 13-room two-storey penthouse in the Upper West Side and a three-house complex on the beach in the Hamptons.
In 2015 he bought the penthouse of the 1,005ft skyscraper One57 for $91.5m as a “fun investment”. He uses the apartment on the 75th and 76th floors for extravagant parties to entertain his business and celebrity friends. Ackman planned to hold on to the six-bedroom, eight-bathroom penthouse with views of Central Park for a few years before “flipping it” – selling it at a huge profit in a few years.
Ackman, who studied for both his undergraduate history degree and MBA at Harvard University, set up his first hedge fund Gotham Partners with a fellow Harvard grad, David Berkowitz. The fund closed in 2002 shortly after the US securities and exchange commission (SEC) investigated alleged market manipulation in Gotham’s shorting of shares in investment firm Municipal Bond Insurance Association (MBIA). The regulator found no evidence of wrongdoing, but six days of embarrassing public disclosures left the firm’s reputation in tatters.
Ackman was not deterred though and went on to establish Pershing Square Capital with $54m of investment. It now has more than $8bn under management.
He prided himself on the diversity of the funds hires, with early recruits reportedly including a fishing trip guide, a tennis coach and a guy he had met in a cab.
On Thursday night Ackman released a statement defending himself against charges that his CNBC appearance was designed to spook the markets. “On CNBC, I disclosed my beliefs to the best of my ability,” he said. “Yes, I got somewhat emotional as I talked about protecting my immune-compromised father from the ravages of the virus.
“But I had become bullish because of my belief that the entire country would soon go into lockdown, and that would be the fastest and best way to minimise the impact of the virus. And that was why I explained that we were buying stocks. I also wanted to shout from the rooftops about the importance of taking the virus seriously so that we would build a consensus to lockdown the country as soon as possible.
“In light of our concerns we had two choices: we could either sell all of our investments or hedge our portfolio. We chose to hedge coronavirus risk rather than sell because we are long-term investor, and we believe that all of our companies would eventually recover, and create substantial value over the long term.”
The bet revealed this week is not the first time Ackman has profited from the coronavirus pandemic. He made a $650m gain selling a 1.1% stake in Starbucks at the end January for about $85 a share shortly after the chain closed half of its stores in China in the early stages of trying to contain the pandemic. Starbucks shares fell to $58 during his CNBC appearance. He has since bought back into the stock.
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