Activist investor Bill Ackman almost bailed out of the capital markets in the face of stocks’ coronavirus-driven rout, but he chucked that idea to make a savvy bearish bond-based bet on the slide—a move that bagged him a $2.6 billion profit.

Initially, fear over the baleful impact of COVID-19 led him to consider, “for the first time ever, liquidating the portfolio in its entirety because we believed it was likely that markets would decline materially,” Ackman wrote in a letter to investors in his company, Pershing Square Capital Management. That meant both stocks and bonds.

Then he changed his mind: “After a careful review of the portfolio, we concluded that a hedging strategy was more consistent with our long-term ownership philosophy and would likely lead to a better long-term outcome than selling off all of our assets.”

To protect the portfolio against the coronavirus’s economic impact, Pershing Square paid about $27 million for the hedges, buying credit protection on investment-grade and high-yield indexes, Ackman said. The hedges, in the form of credit default swaps, generated $2.6 billion in proceeds by the time he exited them on March 23.

From early March to March 23, when the rescue effort from Congress and the Federal Reserve took shape, investment-grade bonds lost 6.2% and junk bonds were down 19.7%, data from Bloomberg Barclays Indices show. A credit default swap is a derivative that, in effect, allows an investor to bet that certain fixed-income securities, in this case these two classes of corporate bonds, will drop.

At their apex, Ackman indicated, the hedges amounted to about 40% of the firm’s total capital. The upshot: The company generated 11% on its investments last month, according to its website.

The stock market turnaround and a bond price recovery led him to unwind the hedges after March 23, he wrote. He said he was encouraged by a “much more favorable risk-reward ratio” in shares Pershing bought cheaply during the market plunge.

Among shares he added were those in Warren Buffett’s Berkshire Hathaway conglomerate, coffee chain Starbucks, and home improvement retailer Lowes. He said these are “essential businesses” that will do well even if there’s another virus-related plunge.

Last month, saying “hell is coming” if drastic moves weren’t implemented, Ackman called for a 30-day nationwide shutdown to impede the outbreak’s spread. But with the Washington rescue taking form, he then grew encouraged and bought the stocks (some of which he already had positions in, such as Berkshire).

“While it is hard to be positive when we know that tens of thousands more will die and many more will get severely sick,” he added, “I have no choice but to be more optimistic about the intermediate future based on the data and facts I have seen recently. I hope I am right.”

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Tags: Bill Ackman, Coronavirus, Hedge Fund, Pershing Square, Stocks