Wednesday, Mar 4th 2020

Bill Ackman now hedging against coronavirus


"We believe this approach to hedging is preferable to that of selling our portfolio of high quality, conservatively financed companies." - Bill Ackman

We recently initiated full hedges for all Titan clients based on their individual risk profiles (the more conservative you are, the greater the hedge).

Our Research team is constantly scouring the investing world for learnings on how other hedge funds are positioning their portfolios and how we can improve yours. Today we came across a note from legendary investor Bill Ackman of hedge fund Pershing Square Capital.

Ackman said he too is now hedging his fund's portfolio. He's basically safeguarding his holdings, which include restaurant stocks like Chipotle and hotel stocks like Hilton, against the impact of the coronavirus as it continues to threaten equity and credit markets in the U.S. and abroad.

He didn't disclose the specific hedges he's using, but we think a combination of credit index put options and/or volatility index call options is likely.

In any case, both we and other hedge funds seem to be similarly minded at this stage: remain invested in high-quality companies unlikely to be badly hurt by coronavirus, while going long hedges to protect against what we believe could be a double dip.

If you're curious, the key excerpt from Bill Ackman in Pershing Square's recent communication to investors is below:

"During the past ten days, we have taken steps to protect the portfolio from downward market volatility. We have done so because we believe that efforts to contain the coronavirus are likely to have a substantial negative impact on the U.S. and global economies, and on equity and credit markets.

*Our approach to address this concern has been to acquire large notional hedges which have asymmetric payoff characteristics; that is, the risk of loss from these hedges is limited, while their potential upside is many multiples of our capital at risk. These hedges will likely mitigate portfolio losses in severe market declines, while also somewhat reduce the portfolio’s upside potential if there is minimal economic or market impact from the virus.*

We believe this approach to hedging is preferable to that of selling our portfolio of high quality, conservatively financed companies whose long-term intrinsic value is not likely to be materially affected by coronavirus developments."

As of this writing, SH was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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