Swaption Asymmetric Credit Hedges & Bill Ackman's 100x Trade

In February 2020, as financial markets priced in near-zero probability of global macroeconomic disruption, Bill Ackman executed one of the most profitable hedging transactions in Wall Street history. Risk management audits in the Bill Ackman Pershing Square 13F portfolio tracker analyze his asymmetric credit default swap (CDS) swaption hedge.

Anticipating severe pandemic-driven economic shutdowns, Pershing Square purchased massive quantities of credit default swap indices on global investment-grade and high-yield corporate credit. Because credit spreads were trading at historically compressed levels, the premium cost was an extraordinarily low $27 million.

When global credit markets experienced unprecedented liquidation panic in mid-March, corporate spreads widened dramatically. Ackman systematically unwound the CDS protection contracts into peak market terror, booking a net profit of $2.6 billion—a staggering 100-to-1 cash return that was immediately redeployed into bargain-priced public equity holdings.