Is Bill Ackman’s coronavirus win the greatest stock market bet of all time?

Bill Ackman’s extraordinary call that made $2.6bn off a $27m bet in March was described by The New York Times as “the best single trade of all time”.

There have been several stock market winners throughout the COVID pandemic but none matched Ackman’s - the founder of Pershing Square Capital Management - explosive success.

Mark Spitznagel earned Universa investors 3,612% in March, but that was the result of a long-term strategy that last saw vaguely comparable figures 12 years ago. Meanwhile, Boaz Weinstein’s 71% return at Saba Capital was based on buying up credit default swaps for six months before anyone had even heard of coronavirus.

Ackman’s though, was a single successful trade. But is it the best of all time? Here’s how it compares to a few other spectacular calls.

“Hell is coming”

Bill Ackman, 2020

Profit: $2.6bn

In mid-March, Bill Ackman warned during an interview with CNBC that the US was severely underestimating the COVID crisis.

“Hell is coming,” Ackman warned, following nightmare about a viral outbreak. He predicted the virus would kill one million Americans and called on Donald Trump to lockdown the country – which subsequently spooked the markets and resulted in frenzied selling.

While Ackman was clearly genuinely frightened about the potential human tragedy, he was also using credit protection on investment-grade and high yield bond indexes to bet that coronavirus would crash the stock market.

But it was his extraordinary timing — Ackman hedged in late February, as the S&P 500 was hitting a record high of 3,386.15, and exited on 23 March, the day of the index’s nadir at 2,237.40 — that realised such a profit.

“We said: ‘you know what, we’ve got this massive position ... which maybe has the potential to double if credit spreads widen to where they were during the financial crisis’,” he said later.

“‘But if they don’t, and the government takes the right steps, this hedge could be worth zero, and the stock market could go right back up to where it was.’ So we made the decision to exit.” He then invested more than $3bn in risk assets, which paid off as the Federal Reserve heeded his calls to bail out the economy.

Watching the house of cards fall

Kyle Bass, 2007

Profit: $500m

Like all good detective stories, the tale of Kyle Bass starts with a chance encounter with a New York investment banker about the fragility of America’s subprime market.

Bass, a former middle manager at Bear Stearns who had founded Hayman Capital Management just months earlier, was intrigued. He hired a team of investigators to research the US mortgage market and find out which residential mortgage-backed securities were most likely to default.

He then began buying credit default swaps — effectively betting that the whole sub-prime house of cards would fall — and persuaded a handful of others to back him. When the collapse came, sparking the biggest stock market crash since 1929, Bass made $500m in profits with his fund returning over 200% in 2007.

Bass has since enjoyed mixed success on other major calls – he was ahead of the curve in predicting the Greek banking crisis, but his fund lost 19% in 2017 after his forecast that the Chinese yuan would be devalued didn’t come to fruition. But his legend is assured – he is seen as one of the inspirations for 2015 Oscar-winning movie The Big Short.

Energy shortage

Jim Chanos, 2001

Profit: $500m

Jim Chanos knows how to smell a rat. In the mid-1980s, he’d lucratively shorted a minor US insurance company called Baldwin-United after realising the company had beefed up its books with money that didn’t exist.

In 2001, when he learned that energy companies were permitted to use “mark to market” (MTM) accounting, enabling them to add the current value of future profits to their accounts, he and his colleagues at Kynikos decided to dig around one of the biggest – Enron [ENE].

Chanos’s investigations found that Enron was using MTM to bolster its profit numbers while listing its losses through special purpose entities, which were private companies that existed only on paper and were almost impossible to trace back to the company.

When CEO Jeff Skilling announced he was stepping down “for family reasons”, Kynikos shorted the company, which promptly collapsed to $0.26 a share. The collapse left one of America’s energy giants in ruins, its accountants ‘Big Five’ firm Arthur Andersen destroyed, and Chanos with $500m profit.

Nearly two decades later, Chanos still shorts companies which rouse his suspicions – albeit less successfully. He has been shorting Tesla [TSLA] for years, saying it has “zero value” – but so far, the car maker has been proving him very wrong.

An earth-shattering prediction

Paul Tudor Jones, 1987

Profit: $100m

In February 1987, Paul Tudor Jones sensed a crash was coming. “There will be some sort of decline,” he warned. “Without a question, in the next 10 months, and it will be earth-shattering, sabre-rattling.” Few heeded his warning – and Jones went on to make $100m.

Jones was convinced the market was overvalued and that the history of 1929 was repeating itself – so he did his homework, thoroughly. Throughout that summer, he and his deputy Pete Borish pored over 60-year-old ledgers and launched innovative computer micro-models based on the Great Crash.

The parallel patterns they saw backed up their hunch and at the start of October Jones began — to the bafflement of rival traders — to actively trade against the market, offloading all his stock. The crash duly came and, with no circuit breakers to limit the fall, some of Wall Street’s sharpest traders were left with nothing as Jones walked away with $100m.

“It’s the same old story so often, just with different characters, different times, different plots,” he said later. “So that looked a lot like 1929 to me. It was obviously an absolute accident waiting to happen. You could see on any historical metric that the stock market was stupidly overvalued.”