Bill Ackman’s Pershing Square Holdings fell 9.5 percent in June and is now down 26 percent for the year, as investors’ fears of recession outweighed concerns about the inflation Ackman has been inveighing against since last fall.
Ackman argues the recession worries are wrongheaded, with inflation still posing the bigger threat. In a Twitter thread posted on the July 4 holiday, he wrote that “the mild and transitory inflation being priced by the market as of Friday is a fiction. Rates are going up a lot soon.”
He also predicted on Twitter that “in order to stop the inflationary spiral, the Fed will need to rapidly raise rates to 4-5% by next year, which hopefully will be enough to snuff inflation.”
Ackman’s tweets are often derided as simply a way to talk his book. In this case, he sought to defuse that perception by writing, “And yes, we put our money where our mouth is. I have often wondered why investors who share their views are often criticized for holding investments on which they will profit if the views they share turn out to be correct.”
That said, Ackman’s bet on rising rates, which has protected the fund for most of this year, hurt the fund in June, as short-term rates fell dramatically following the Federal Reserve’s hike of 75 basis points midway through the month.
In fact, the hedge fund’s loss of 24.7 percent during the second quarter is its worst quarterly performance since March of 2016, when its ill-fated bet on Valeant, the Canadian pharmaceutical company, blew a big hole in Ackman’s returns. During that quarter, Pershing Square Holdings fell 25.6 percent (but ended the year down only 13.5 percent).
The situation in 2022 is much different. In 2016 the markets were buoyant, and most of Ackman’s other holdings held their own that year. With the S&P 500 falling into a bear market and no place to hide — it was down 21 percent for the first half of the year.
Pershing Square’s three biggest stock holdings are down more than the market. Through June, Universal Music Group is down almost 23 percent, Lowe’s Companies fell more than 32 percent, and Chipotle Mexican Grill is down 25 percent.
For most of this year — and last year — Ackman’s portfolio has been protected by an interest rate hedge that he put on early in 2021 in the expectation that the Fed would have to raise rates to battle inflation. Since last fall, he has been vocal in his belief that the Fed should be aggressive in that effort.
But even though the Fed did raise rates by 75 basis points last month, the specter of a recession has led investors to bid down short-term rates since the central bank’s move.
Ackman thinks that’s wrongheaded, as he laid out on Twitter. “Over the past two weeks, rates have declined dramatically purportedly due to fears of a recession,” he wrote, in the beginning of a long thread.
While a recession is technically a two quarter decline in real GDP, when inflation is as high as it is, it's hard for GDP to exceed inflation, Ackman argued.
Moreover, the economy is still growing, not contracting, because consumer spending is up, employment is low, and wages are still rising, he said.
Ackman said that rates have also declined “so dramatically” due to “technical factors that are driving volatility and the downward move in rates.”
“Market participants speculating in the fixed income market, particularly hedge funds, often use enormous amounts of leverage because it is available and it allows one to make windfall profits if you get the trade right.” he explained. “The bet that rates would rise became one of the more crowded trades in history going into June 15. As speculators covered their shorts on the Fed news, rates began to decline, causing substantial mark-to-market losses particularly for levered participants, who were forced or chose to cover.”
The short covering and a slowing economy also resulted in short covering at the end of the quarter, because “exposures are required to be disclosed in investor reports and financial statements,” he added.
The downward move and volatility was exacerbated on the Friday before the holiday, according to Ackman: “Extremely limited liquidity going into the July 4th holiday compounded the move and the volatility and pain for levered market participants, as traders looked to, and in many cases, were forced to exit, or didn’t wish to hold open positions over the long weekend.”