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Hello, how are you? When the market is in a downturn , a huge opportunity arises . In this video, I'll tell you how one hedge fund manager, Bill Ackman, made a 100x return on his investment in just 30 days. This deal started at $27 million and soon grew to $2.6 billion. Bill Ackman is an activist investor.
Many of you probably don't even know who he is, although some may remember him for his failed bet against Herbalife stock, as he expected the stock to fall to zero, believing the company to be a fraudulent Ponzi scheme. Well, Herbalife did have a questionable business model, but Ekman lost out on it.
Bill Ackman began playing Herbalife short in December 2012, when the stock was trading at around $20 a share. He bet an incredible $1 billion that stocks would crash. However, 5 years later, in 2017, he closed his short position at $40 per share and lost a whole billion. Many investors began to leave his fund, Pershing Square Capital Management, questioning his skills and abilities as a professional investor, as he had been underperforming the market for years.
Since 2011, the S&P 500 index has outperformed Bill Ackman's fund almost every year. In 2015 and 2016, his fund posted negative returns, while the S&P 500 rose more than 36% over the same period. Well, it's no wonder why many investors have walked away from it. As of the first quarter of 2020, Bill Ackman managed over $6.5 billion in his public investment fund , as well as several billion in another private fund.
However, if you look at its 2019 and 2020 returns , I'm sure new investors will think twice before walking away from it. Considering his performance in 2019 and 2020, as well as over the long term since 2004, Ekman has been able to beat the market. He received an average return of 15% compared to the market's 8%.
In 2019, he managed to gain an incredible 58% compared to 30% for the S&P 500. And in 2020, as of the first quarter, his portfolio grew to triple digits, while the market was in the double digits. Let's take a closer look at Ekman's short position and compare it to Michael Bure from the movie "The Downside Game." Both Bill Ackman and Michael Bure bought credit default swaps out of the money.
Do you want to bet against the real estate market? Yes. Yes. We are ready to sell you 5 million credit default swaps on these mortgage bonds. Can we make 100 million? Certainly. We can make 100 million. Is there a way to make 200 million? 200 million? Of course, we can make 200 million. We are Goldman Sachs.
Well, man. Barry started playing for a housing market downturn back in 2005. That same year, it also underperformed the market. In 2006, he even lost 18% of his profits. As with others, Barry's investors were losing patience and began withdrawing money from his fund. That's when he stopped all withdrawals.
I currently have reason to believe that the mortgage bond market is fraudulent. So, to protect investors from this fraudulent market, I have decided to restrict withdrawals until further notice. Sincerely, Dr. Michael J. Berry. Its main premise was that the mortgage default rate would rise to 8% in 2007.
After closing his short position, he made $100 million . But it also made its investors $700 million. He was able to purchase credit default swaps, or CDS for short , which are essentially insurance on mortgage-backed securities or other corporate debt . During the 2008 housing bubble, many experienced investors did not understand that loan defaults could occur because the housing market was stronger than ever.
How many people did you talk to about this deal? With several. There is definitely some interest. Oh, my boss would rip my head off. Are you out of your mind? Get out of here. Go to hell. That's why you're here and calling us on the wrong number. Do you smell that? What is this ? What? What is that smell?
Cologne? No. Possibility. No, money. Okay. You smell money . The default rate has already gone from 1% to 4%, guys. And if it goes up to 8%, which it will, many of these triple-B bonds will also depreciate to zero. And you are too close. This is an opportunity. Okay. You say that bonds will burst at 8% , but we are already at 4%.
That's right. If they get to eight, it will be Armageddon. Yes, that's true. Why is no one talking about this ? So, you're offering us a chance to play for the lower end of this pile of blocks. As? Through what is called a credit default swap. It's like bond insurance. And if everything collapses, you can make a profit of 10 to one, even 20 to one.
And it is already slowly falling apart. 10 to 1, 20 to 1. It can't be. And no one pays attention to it. Mortgage bonds are crap. CDO is crap wrapped in other crap. Yes, that's right. Mortgage bonds are crap wrapped in other crap. Well, yes, that could be another analogy. With Bill Ackman, the story is similar, but with a much shorter time frame.
If Michael Bury's assumption required two years of painful waiting for his prediction to come true. It only took Ackman one month to make his profit. Let's take a quick look at what Ackman said right after he made the short bet. Hell is approaching. OK. And I...I felt, you know, I've never had an experience like this in my life.
The closest I came to that was the financial crisis, when I said, "You know, things are bad, something is coming." But it was a feeling I'd never had before, like a tsunami was coming, you know? The tsunami is approaching. You feel it in the air. OK. This was Bill Ackman speaking to Scott Wapner on CNBC on March 18th.
This speech, as you may recall, sparked a lot of controversy after it was revealed that Ackman's Pershing Square fund made $2.6 billion in profits from betting against the stock market. A lot has been said. Actually, yesterday I also spoke out against him , having read many materials published in Forbes, the Wall Street Journal, and the New York Post.
In a letter published last night, Ackman describes what happened. I also spent a lot of time with him on the phone yesterday . He said he bought credit default swaps in late February because he was convinced bad times were coming . He was following developments in China very closely, and even then he was convinced that some kind of economic collapse was inevitable in Europe and the United States .
He issued a press release back on March 3, describing his actions and stating that he was making this bet to protect many of the positions the fund held. At that point, he said, the bet he made was worth zero dollars. He issued a second release on March 9, saying that by then it was already worth a lot of money, as the value of credit default swaps had increased significantly.
And then, March 12th, you just heard from Mike Santoli, that was the day the market fell about 10%. He said that day, because the market had crashed so much, he started closing that bet, getting out of it. It took him about 10 days to fully recover from it. Meanwhile, on March 18, he wrote to the president on Twitter demanding that he shut down the country because he was concerned about what was happening at the time.
Scott Wapner called him and he agreed to go on the Halftime Report. This call was somewhat startling. People heard how panicked he sounded at that moment. During the conversation, he said he was buying stocks, that he was feeling better about the situation, and stated that he believed in the future of the country.
He didn't complete the closing of that deal. It took him a few more days to get out of it, but by the time he spoke to Scott, he said he had already sold more than half of the position. Having received a profit of about 1.3 billion dollars. I think, reading about it and talking to him a lot , you could say that it wasn't so much about making a profit as it was a way to cover long positions.
He has long positions in stocks such as Lowe's, Hilton, Agilent, Berkshire. He used the profits from closing that deal to reinvest them in stocks he liked at the time. All those promotions I just mentioned. And I guess if you really think about what a hedge fund is, you're overlapping your hedges. You are hedging your bets—he did not sell any of his long positions, but he was hedging against a big sell-off that might occur.
And that's what brought results in that position. So, again, there's a lot of controversy around this. Yesterday I was one of the critics , but I will say that after talking to him I understand much better what happened and what it all meant. Ackman made this bet back in February, sounding the alarm about how bad the state of our economy would be.
He even tweeted a proposal to the president to close the country for the next 30 days and close the borders. For the first time in history, Ackman considered completely liquidating the portfolio because he believed the market was likely to fall sharply . Then he changed his mind. After carefully reviewing the portfolio, they concluded that a hedging strategy was more consistent with their long-term holding philosophy and would yield a better outcome than selling assets.
To protect the portfolio from economic impact, Ackman paid $27 million for credit default swaps as protection against a high-yield bond index. In the process, he received a whopping $2.6 billion and exited the position on March 23. This is almost a 100- fold return on investment in just one month. However, if the investment did not work out in the first month, he would still be obligated to hold the contract for the next 5 years until it worked out or until he declared default.
This means that he would pay $27 million every month. That's $324 million per year or $1.6 billion over the next five years . Aman could have lost $1.6 billion, nearly 20% of his entire portfolio, if this deal hadn't blown out. Fortunately for him, it only took one month to close this position and make a 100x return on investment.
From the beginning of March to March 23, when Congressional and Federal Reserve efforts began to take effect, investment-grade bonds lost 6.2% and junk bonds fell 19.7%. Aman bought a CDS contract at a new 10-year low. He assumed that credit spreads would widen and junk bonds would default. Credit default swaps increased from 50 to 150%.
This is a 3- fold increase, and that was enough to make a profit. It was a risky bet, but congratulations to Bill Aman on a successful deal. Without a doubt, this will be one of the best deals in the history of finance. Let us know what you think about Bill Aman and his 100x profit deal. Leave your thoughts in the comments section below. Click the like button and subscribe if you haven't already .
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