Please do not leave this page until complete. This can take a few moments.
Hedge fund manager Bill Ackman appeared on CNBC earlier this month tearfully begging for the stock market to be shut down because he thought "hell" was coming."
But investors didn't realize that Ackman was about to profit in a big way from the turmoil on Wall Street.
Ackman recently disclosed in a shareholder letter to investors in his Pershing Square Capital Management funds that he made $2.6 billion as stocks fell.
How did Ackman do that? He had hedges designed to generate a profit as the broader market tanked in the wake of concerns about the coronavirus pandemic.
Ackman is not alone. Several investors have benefited from the big drop on Wall Street this year. Most have done so by short selling stocks or owning ETFs that have been betting against the market.
Short sellers typically make money by borrowing a stock and selling it, with the hopes of buying it back later at a lower price.
The difference between the original sale price and the repurchase price is the profit. In other words, if you short sell a stock at $50 and it goes down to $30, you make $20.
Two ETFs that use this strategy to bet against the broader market -- the Direxion Daily S&P 500 Bear 1X Shares ETF and ProShares Short S&P500 ETF -- are both up more than 13% this year while the S&P 500 itself is down nearly 19%.
And two funds that are picking individual stocks to short -- the AdvisorShares Ranger Equity Bear ETF and AdvisorShares Dorsey Wright Short ETF -- have soared nearly 30% and 55% in 2020 respectively.
Investors are making particularly big short bets on companies that stand to lose the most due to a prolonged slump in economic activity,
With that in mind, hotel chains Marriott and Hilton and global industrial equipment company Caterpillar are stocks that have been big targets of short sellers as of late.
This is "some obvious quarantine related short selling," said Ihor Dusaniwsky, managing director of predictive analytics for research firm S3 Partners, in a report late last week.
Still, the gains that investors generate from short selling can quickly evaporate if the broader market or individual stocks that are heavily shorted start to rebound.
That might be what's happening now. Investors may be starting to realize that the vicious March market meltdown may have been too extreme.
"During the fastest selloff in history by some measures, it was not a surprise to see 'the baby thrown out with the bathwater,'" said UBS Global Wealth Management's deputy Americas chief investment officer Solita Marcelli in a report this week.
And when markets start to bounce back, that makes the pain for short sellers even worse. The losses for short sellers increase every time a stock they shorted goes up because they eventually have to buy back the stock they borrowed.
Again, lets look at the example of the short seller who borrowed a stock at $50. But instead of the stock going to $30, lets say that it rises to $70. The trader is now looking at a $20 loss. If it goes up even more to $90, that's a $40 loss. And so on.
This creates a phenomenon known as a short squeeze.
"If the market continues to rebound, paying high daily financing expenses and seeing mark-to-market profits dwindle is the main recipe for a short squeeze," said S3's Dusaniwsky.
The ProShares Short S&P 500 ETF has plummeted 8% in just the past five days as the broader market has rebounded.
Even Ackman seems to think that the worst might now be over for the markets.
Ackman wrote in his shareholder letter that Pershing has "redeployed substantially all of the net proceeds from our hedges" by adding to positions in companies he already owns -- such as Agilent, Warren Buffett's Berkshire Hathaway, Hilton, Lowe's, and Restaurant Brands.
Ackman said he also bought a new stake in Starbucks after selling the position in January.
So it seems that he might have changed his tune a bit. He was scared, but now he's using the money he generated from his bearish bet to take advantage of the low prices in the market.
"By selling the hedge, we generated $2.6 billion of proceeds, the substantial majority of which we invested in both new and existing investments, which we believe will payoff as markets recover," Ackman wrote.
The Hartford Business Journal 2025 Charity Event Guide is the annual resource publication highlighting the top charity events in 2025.
Learn moreHartford Business Journal provides the top coverage of news, trends, data, politics and personalities of the area’s business community. Get the news and information you need from the award-winning writers at HBJ. Don’t miss out - subscribe today.
SubscribeDelivering vital marketplace content and context to senior decision-makers throughout Connecticut ...
All Year Long!
The Hartford Business Journal 2025 Charity Event Guide is the annual resource publication highlighting the top charity events in 2025.
Hartford Business Journal provides the top coverage of news, trends, data, politics and personalities of the area’s business community. Get the news and information you need from the award-winning writers at HBJ. Don’t miss out - subscribe today.
Delivering vital marketplace content and context to senior decision-makers throughout Connecticut ...
All Year Long!
In order to use this feature, we need some information from you. You can also login or register for a free account.
By clicking submit you are agreeing to our cookie usage and Privacy Policy
Already have an account? Login
Already have an account? Login
Want to create an account? Register
In order to use this feature, we need some information from you. You can also login or register for a free account.
By clicking submit you are agreeing to our cookie usage and Privacy Policy
Already have an account? Login
Already have an account? Login
Want to create an account? Register
This website uses cookies to ensure you get the best experience on our website. Our privacy policy
To ensure the best experience on our website, articles cannot be read without allowing cookies. Please allow cookies to continue reading. Our privacy policy
0 Comments