Bill Ackman Is Betting Big On Inflation. Here’s How You Can Too.

Bill Ackman Is Betting Big On Inflation. Here’s How You Can Too.
Stéphane Renevier, CFA

about 2 years ago4 mins

  • Bill Ackman thinks inflation will rise higher and stay there.

  • That could lead the Fed to raise rates more quickly than the market expects, presenting a big risk to asset prices.

  • So Ackman built a big hedging position by buying put options on short-dated bonds – as well as investing in companies that should preserve their pricing power.

Bill Ackman thinks inflation will rise higher and stay there.

That could lead the Fed to raise rates more quickly than the market expects, presenting a big risk to asset prices.

So Ackman built a big hedging position by buying put options on short-dated bonds – as well as investing in companies that should preserve their pricing power.

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Last year, Bill Ackman shorted the credit market to the tune of $27 million – and it earned him $2.6 billion. Now, he’s at it again: Ackman’s $170 million bet on higher inflation is currently worth $1 billion and could gain further yet. If you’re looking to ride on the legendary investor’s coattails, here’s how to replicate his big bet.

What’s Ackman’s view on inflation?

Ackman thinks that the combination of fiscal stimulus, monetary stimulus, the release of pent-up demand, and supply disruptions have created the perfect cocktail for inflation to be the biggest threat to investors’ portfolios.

More worryingly, Ackman reckons this could be more than a flash in the pan. There are many factors that could push inflation well above the Fed’s 2% target for a lot longer than the market expects:

  • Higher wages have become politicized and are unlikely to be rolled back.
  • Pandemic-hit millennials are spending less money on services and “experiences'', and more on goods or real assets – like property.
  • “Made in America” and economic protectionism might increase the price of many of the goods and services that were once produced more cheaply abroad.
  • Switching to cleaner – but more expensive – alternative energy sources could be a long-term inflationary trend.
  • Technology might not be as deflationary as some believe:many disruptions have already taken place and the biggest tech companies have started to shift from a volume strategy (to gain market share) to a price strategy (to improve profitability).

What’s Ackman's big inflation trade then?

Ackman fears that a period of sustained high prices will force the Fed to taper and raise rates at a much faster pace than the market currently expects. That could lead to interest rates rising in a volatile fashion and could seriously threaten the bull market of assets that have been supported by the slow and steady fall of interest rates over the past decade. In fact, Ackman is warning that signs of a classic bubble are everywhere, with “every indicator flashing red” – from surging real estate prices to a buoyant art market.

But Ackman isn’t shorting everything. Rather, he’s identified the trades with the highest “asymmetry” – trades that could return a lot more if he’s right than lose if he’s wrong – and implemented them as a hedge for the rest of his portfolio. More specifically, Ackman accumulated a huge short position in short-dated bonds earlier this year by buying cheap, out-of-the-money options. And he’s already made a killing with the trade, turning a $170 million bet into $1 billion – a more than six-fold return. And while the trade has already performed exceptionally well, Ackman doesn’t appear to have taken his profits yet, meaning he probably sees further gains ahead.

The rest of Ackman’s portfolio isn’t as aggressive, with long positions in companies that are well-positioned to handle higher rates and inflation. In a recent conference call, he made the case for investing in stocks that can preserve their pricing power and pass inflation costs to their investors – like Lowe’s (ticker: LOW), Hilton (HLT), Restaurant Brands (QSR), and Chipotle (CMG), which represent the fund’s four largest holdings.

What’s the opportunity there?

If you want to replicate Ackman’s inflation hedge, you could look at buying put options on cheap and liquid short-term bond ETFs – like the Vanguard Short-Term Bond ETF (Ticker: BSV, expense ratio: 0.05%) or the iShares 1-3 Year Treasury Bond ETF (Ticker: SHY, expense ratio: 0.15%). Alternatively, you could buy put options on longer-dated bond ETFs like iShares 7-10 Year Treasury Bond ETF (Ticker: IEF, expense ratio: 0.15%) or iShares 20+ Year Treasury Bond ETF (Ticker: TLT, expense ratio: 0.15%). Those may not be as reactive as shorter-dated ones to changes in the Fed’s monetary policy but are arguably trading at a better entry level. While you may not be able to repeat the sort of gains Ackman realized earlier in the year, put options on those ETFs should still do a good job at hedging further inflationary pressures.

Longer-dated bond yields may have catch-up to do. Source: Koyfin
Longer-dated bond yields may have catch-up to do. Source: Koyfin

If you have a more conservative outlook, you could look more closely at the top four stocks Ackman’s holding – or even consider identifying your own “quality” play. Goldman’s list of the most efficient companies would be a good place to start: it identifies companies with the highest sales value per employee.

Goldman Sachs's “most efficient stocks”. Source: Goldman Sachs
Goldman Sachs's “most efficient stocks”. Source: Goldman Sachs

Even if you disagree with Ackman’s view on inflation, this is still an opportunity to learn some valuable lessons from one of the world’s top investors.

First, it’s important to think independently. The consensus is not always right, and Ackman has made some of his biggest profits when the market was not discounting the risks properly – like during the beginning of the pandemic last year. Second, it’s not just about being right or wrong – it’s also how you implement your view. By identifying the most asymmetric trade opportunities, Ackman turned small hedges into huge gains for his funds. Third, it’s important to keep dry powder for when those opportunities arise, and act decisively when they do. And last but not least, always pay attention to what Bill Ackman says! 😉

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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