Billionaire Bill Ackman the founder of hedge fund Pershing Square Capital has put on another big trade betting against corporate credit markets. What has he done?
Key trade details
- The trades are a hedge against his equity portfolio, meaning they make money when other parts of the portfolio lose
- It is a bearish bet against the corporate credit market - linked to approx. $20 billion investment grade or junk bonds
- The trades use credit default swaps (CDS) - a bit like in the movie The Big Short
- The trade was placed on the day that the Dow Jones reached a record high after the positive trial data from the Pfizer vaccine
- Facts come from an interview by Ackman with the Financial Times at a conference
Define: What is a CDS?
An derivative instrument that acts as insurance on the default of an obligation.
There is a buyer of default protection who pays a premium to the seller for the duration that they own the CDS. The seller collects the premium as an income and only pays out to the buyer if the bond defaults.
It’s not necessary for the bond to default to profit as a CDS buyer. The price of the CDS will rise when the probability of default increases.
This is the explanation from The Big Short movie- which cuts to the chase nicely!
So you’re offering us a chance to go short - how?”
“With something called a credit default swap, it’s like insurance on the bond and if it goes bust you can make 10:1 even 20:1 return!”
What is Ackman’s trade idea?
According to his interview, the explanation for the trade appears to be a culmination of factors that top traders should always consider - price, risk, reward, probabilities
How to play it
ETF on the European CDS market
iTraxx Europe IG Bond Ucits ETF
ETFs on the junk bond market
iShares iBoxx $ High Yield Corporate Bond ETF
iShares iBoxx $ Investment Grade Corporate Bond ETF
ProShares Short High Yield
CP High Yield Trend ETF
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