Investment guru Bill Ackman has taken measures to protect his hedge fund’s $6.6 billion portfolio after a rough start to the year.
“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,” MarketWatch quoted the Wall Street billionaire as recently writing to investors.
Ackman said his firm, Pershing Square Capital Management, bought long notional hedges to limit losses in the fund’s portfolio amid coronavirus-spurred market volatility.
(A long hedge refers to a futures position that is entered into for the purpose of price stability on a purchase, Investopedia explained.)
Ackman is basically safeguarding his holdings, which include restaurant and hotel stocks, against the impact of the coronavirus as it continues to threaten equity and credit markets in the U.S. and abroad, MarketWatch explained.
“We have taken steps to protect the portfolio from downward market volatility,” he wrote. Ackman, who rarely gives the public a glimpse into the inner workings of the fund, offered no details on the specific steps.
He explained that he would rather hedge than unload positions in stocks like Chipotle (CMG), Hilton (HLT), Lowe’s (LOW), Restaurant Brands (QSR), and Berkshire Hathaway (BRK.A), all of which he considers strong businesses otherwise.
“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,” Ackman wrote.
Meanwhile, U.S. services sector activity jumped to a one-year high in February, suggesting strength in the economy before a recent escalation of recession fears ignited by the coronavirus epidemic that prompted an emergency interest rate cut from the Federal Reserve.
The economy's solid fundamentals were also underscored by other data on Wednesday showing private payrolls increased more than expected in February, in part as unseasonably mild weather bolstered hiring at construction sites and in the leisure and hospitality industry. A report from the Fed described the economy as growing at "a modest to moderate rate over the past several weeks," but noted rising concerns over the coronavirus, Reuters explained.
The U.S. central bank on Tuesday slashed its benchmark overnight interest rate by a half percentage point to a target range of 1.00% to 1.25%, in the Fed's first emergency rate cut since 2008 at the height of the financial crisis. Fed Chair Jerome Powell said, "The coronavirus poses evolving risks to economic activity."
"Going into any potential coronavirus slowdown, the economy is in good shape," said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.
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