Bill Ackman’s Pershing Square posted 9% losses last year, as Lowe’s and Netflix offset winning bet on interest rates

Explaining in its Feb. 9 letter, fund manager Ackman said its interest rate hedge was the largest contributor to its performance last year, making it “meaningfully” outperform the S&P 500 index which fell almost 20% last year.

In December 2020, it “acquired out-of-the-money interest rate swaptions to protect our portfolio against an unexpected rise in interest rates,” the letter explained.

In a Jefferies note to clients on Friday, equity analyst Matthew Hose said previous versions of this strategy have generated high returns in the past, but “the hedges are typically restructured once gains are generated, as they become naturally less asymmetric,” he told clients.

The $2.7 billion gain, however, was not enough to mitigate the losses from a number of stocks in its portfolio causing the 9% loss in net asset value. The fund said the main detractors Lowe’s
LOW,
-0.67%,
Netflix
NFLX,
-3.03%
and Chipotle Mexican Grill
CMG,
-1.87%,
Domino’s Pizza
DPZ,
+0.07%,
Universal Music Group
UMG,
-2.52%

UMGNF,
-1.44%,
Hilton Worldwide
HLT,
-3.05%.

Pershing sold its positions in Netflix and Domino’s Pizza to free up capital for new opportunities, it said.

Closing the gap

Ackman also mentioned in the letter that Pershing Square’s discount to net asset value widened almost 5% to 33.2% by the end of the year.

Hose explained that “the ultimate solution” to rectifying this was potentially migrating the firm’s London-listing to the U.S.

“It would likely offer a very good chance of materially narrowing the discount, given the nexus for the fund and manager has always been the U.S. anyway,” he said.

“This possibility is also something that we do not feel is currently reflected in PSH’s share price,” he added.

Pershing Square Holdings Ltd. was trading over 1% down on Friday.