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With Hedges in Place, Ackman Calls on the Fed to Raise Rates

Inflation fears notwithstanding, Pershing Square is having another strong year.

Even with five million fewer people employed in the U.S. than before the start of the Covid-19 pandemic, the economy’s recovery has been so robust and the threat of inflation so high that hedge fund manager Bill Ackman thinks the Federal Reserve should “begin raising rates as soon as possible.”

“A ‘wait and see’ approach to raising interest rates creates significant risks given the substantial progress to date on employment and inflation combined with the unprecedented economic backdrop,” Ackman wrote in an extensive presentation of the Investor Advisory Committee on Financial Markets to the New York Federal Reserve on Oct. 20.

Ackman, a member of the investor committee, acknowledged on Twitter — where he posted his PowerPoint presentation — that “as we have previously disclosed, we have put our money where our mouth is in hedging our exposure to an upward move in rates, as we believe that a rise in rates could negatively impact our long-only equity portfolio.”

So far, however, the portfolio seems to be doing just fine. This year, Ackman’s Pershing Square Holdings, his publicly traded hedge fund, has been making money off both the interest rate swaption hedge and most of the consumer-oriented companies he owns.

In October Pershing Square Holdings jumped 8.5 percent, for a year-to-date return of 21.6 percent, according to a presentation to investors on Monday. 

At the end of June, Ackman’s interest rate hedge, in the form of a swaption, was doing so well that it became the third biggest contributor to the portfolio’s returns, according to Pershing Square’s semi-annual financial report. With rates continuing to go up, the interest rate swaption is likely to remain a significant driver of performance, although Pershing Square has not released updated numbers on the breakdown.

That said, shares of consumer-oriented companies Chipotle Mexican Grill, Lowe’s Companies, Hilton Worldwide Holdings, and Domino’s Pizza — all  Pershing Square  investments — are also on a roll. Those are all up around 30 percent or more this year. During October, Lowe’s jumped 15 percent, Hilton rose 9 percent, and Domino’s gained 2.52 percent.

However, Chipotle, one of Pershing Square’s top holdings, fell 1 percent during the month. In June, Chipotle said it would raise menu prices to offset the increase in its average hourly rate to $15 per hour.

To be sure, all companies are facing wage pressures and difficulties in hiring. As Ackman pointed out in his Fed presentation, there are currently 2.8 million more job openings than unemployed people. (There are 10.4 million job openings and only 7.7 million unemployed.)

This year Pershing Square’s biggest position — and its biggest winner — is Universal Music Group. Ackman invested $2.8 billion of his hedge funds’ then-AUM of $13.2 billion  — which comes to more than 20 percent — in the company. He raised another $1.2 billion for a co-investment vehicle to take a total 10 percent stake in Universal Music ahead of its partial spinoff from French conglomerate Vivendi. The stock, which began trading independently on Sept. 21, has created gains of about 35 percent for Pershing Square. That gain is based on the stock currently trading around €25 per share, up from Ackman’s cost of €18.58 per share.

The main detractor for Pershing Square this year is Ackman’s special purpose acquisition company, Pershing Square Tontine Holdings, which continues to trade slightly below its IPO price of $20 per share — its net asset value. The stock slumped below NAV after the Securities and Exchange Commission nixed Tontine’s plan to invest in Universal, which was followed by an investor lawsuit against Tontine. 

As a result, Ackman has said he may liquidate Tontine, give investors their money back, and offer them warrants on a newfangled vehicle he invented, called a SPARC (for special purpose acquisition rights company), if the SEC approves it. That process is ongoing. Meanwhile, Ackman is continuing to look for a merger partner for Tontine.

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