Replies to post #780065 on Fannie Mae (FNMA)

[LuLeVan]

Long Common and Long JPS is not a Hedged position - it is a portfolio of two longs.

I think it is a hedged position, although it is two long positions.

Ackman originally held only commons. He later bought JPS to protect himself from potential dilution.

If the government converts its SPS to commons, the value of commons would drop sharply (prices around 10 cents have been mentioned here). However, such a conversion would most likely be followed fairly soon by recap/release, which would bring JPS to near par value (maybe 30% haircut).

Ackman owns about 80% commons and 20% JPS. This ensures that he will not lose money in case of an SPS conversion because the loss in value of his commons would be offset by the increase in value of his JPS.

If only the warrants are exercised, Ackman would win on both his JPS (which go to par, with almost no haircut) and his commons (which could go to $10).

So in the best-case scenario (warrants exercised only), Ackman has a lot to gain, while in ugly scenarios like an SPS-to-common conversion, he has little to lose.

This is what a classic hedge looks like.