Living Hedgend

Bill Ackman made some nice profits on his hedges

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What's going on?

Renowned activist investor Bill Ackman took a step back to admire his artfully maintained hedge fund this week, even as he revealed the coronavirus almost pushed him to give everything the chop.

What does this mean?

When investors think the value of their investments might fall, they have a few choices. The first is to sell up and sit on cold, hard cash. Its value will gradually be eroded by inflation, sure, but that’s better than a sudden drop-off. Another option is to “hedge”: in other words, investors buy assets whose values tend to move in the opposite direction to their existing investments, so that a fall in the value of one is offset by a rise in another.

Ackman’s hedge was more complex: he bought assets whose values would rise as the threat of corporate bonds defaulting increased. And as coronavirus-wary investors sold off global stocks – which lost around 14% of their value in March – as well as increasingly risky corporate bonds, that threat did increase. Ackman’s investments duly climbed higher, bagging his firm $2.6 billion and contributing to an overall 11% return last month.

Why should I care?

For you personally: The power of balance.
No one’s expecting you to chop and change your investments like the pros, but this serves as a handy reminder of the benefits of maintaining a balanced portfolio. If you’re, say, half invested in stocks and half in government bonds – two assets that tend to move in different directions – you might want to rebalance by selling off some of the bonds that rose in value last month, and buying up stocks whose values fell.

For markets: If it’s good enough for Bill…
That’s exactly what Ackman did. He used some of the profit he made to buy up more shares of companies he’d previously backed, taking advantage of their lower prices. Ackman boosted his stake in legendary investor Warren Buffett’s firm Berkshire Hathaway, as well as in hotel chain Hilton and restaurant chain Burger King.

Originally posted as part of the Finimize daily email.

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