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Bill Ackman’s $1 Billion Inflation Bet

Pershing Square made $2.6 billion on a Covid-19 short last year. Now another early macro view is paying off for the hedge fund.

Bill Ackman will be the first to tell you he’s not a macro guy.

But after making $2.6 billion on his big Covid-19 short in 2020, this year another macro short of his is panning out: a $170 million bet on inflation that is now worth $1 billion.

“The world is kind of catching up to our view on inflation,” the hedge fund manager told investors in a quarterly call last week. He noted that his firm, Pershing Square Capital, has notched a six-fold increase on the bet, which was placed in all three of its hedge funds. 

By January, Ackman said he and his team were concerned about a cascade of trends, including the “compounding effects of extremely forward-leaning and aggressive fiscal policy, combined with the most aggressive monetary policy.” At the same time, the economy was feeling the effects of a stimulus from the vaccine as well as the effects of  people emerging from lockdown with both savings and a desire “to have fun.”

The combination “had to lead to huge inflation and it would also ultimately lead to higher interest rates and movement on the part of the Federal Reserve to mitigate the inflation that would be the result of those kind of activities,” he said.

Pershing Square made its bet with options, taking a notional short position principally in shorter-dated maturities of U.S. Treasuries, as well as some longer ten-year dated debt, Ackman said. 

“We were able to set up a bet like that on an out-of-the-money basis very, very cheaply — very much like credit default swaps; but in this case, not swaps but options,” he explained.

“Never before in history have we had a zero percent monetary policy with the effects that are taking place now,” he added. “And I think part of that relates to the fact no one was alive for the perspective that one would have in the last pandemic and the impact it has [had] economically.” He suggested that the current environment is akin to the 1920s.

Ackman has become quite vocal about his views on inflation, recently tweeting out a presentation he made to the New York Federal Reserve in October. In it, he called on the Fed to “begin raising rates as soon as possible.”

The billionaire hedge fund manager said he disagreed with the view that inflation is transitory.

The sudden rise in wages is one example. “I don't see any scenario in which wages get rolled back. If anything, we’re in a world where it’s a political issue that real wages have not kept pace over time. And even now with inflation, wages are going up, but real wages are not going up as much. And I think every CEO is conscious of the multiple of their compensation to that of their lowest paid worker. And that issue is one that’s a sensitive issue for investors, and they want to see the rewards of capitalism spread more widely,” said Pershing Square’s founder. 

Ackman also argued that the pandemic prompted the millennial generation to want to own homes. That demand is likely to continue to affect the price of housing, which is in short supply.

Covid-19 also created supply chain issues that are currently pushing prices up — and whose fallout will also be inflationary.

“The notion of offshoring …is a less appealing notion” but “near shoring and same shoring, manufacturing in America, sourcing stuff here is also going to be more expensive,” he noted.

“We don't think of ourselves as a macro fund, but when we look back over time, there have been a few moments in our history where we've had kind of a differentiated view on things,” he explained, “and we found an asymmetric way to protect ourselves and to make a profit on the basis of that.”

Pershing Square Holdings, Ackman’s publicly traded hedge fund, is up 26.1 percent this year through November 16.

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