Pershing Square's Pandemic Trade (A)

This case explores the decision that Bill Ackman, CEO and founder of the hedge fund Pershing Square Capital, was considering in late February 2020 about hedging the exposure of the fund’s portfolio from the potential financial fallout ensuing from an extreme event like a global pandemic. Bill Ackman had become increasingly concerned about the hedge fund’s exposure to a novel, highly infections, and lethal coronavirus that was spreading across the globe. Ackman and his team needed to decide whether this was a risk worth hedging, and if so, which hedging instruments would best balance risk mitigation, explicit costs (fees and premia), opportunity costs, and the long-run objectives of the fund. Ackman and his team considered fully liquidating their portfolio, as well as hedging it with futures, options, and credit default swaps. For each alternative, they also needed to determine the optimal size and maturity of the hedging position, after accounting for uncertainty over the trajectory of the virus. This case provides students with ample opportunities to analyze and understand tail risk and how to manage it in practice, including explicit calculations of position sizing, costs, risks, and benefits of hedging alternatives.