almost 4 years ago • 2 mins
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”: investors, in other words, 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 💰
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 📊
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.
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.