Are swaps the future for hedge fund value managers using concentrated portfolios?

I know I'm on the opposite trade from Bill Ackman when it comes to the monolines (grr, I wish he would cover his position and take his 90% profit. I know MBIA probably screwed him over before but personal vendettas can be deadly), but he is considered to be a savvy investor who is supposedly a value investor so I pay attention to him. I noticed Bill Ackman's strategy of using swaps in parallel to his stock purchases/sales (thanks to Todd Sullivan's Value Plays for the mention).

In this example, Pershing Square is taking a long position in the stock of Borders Group (BGP) (i.e. buying the stock), while also entering into bullish swap positions that will yield a profit if BGP's stock price rises. Bill Ackman is basically leveraging himself without buying more stock. He is also using CDS (credit default swap) alongside his short positions in MBIA and Ambac.

Swaps such as CDS are one of the fastest growing part of the derivatives world. If you are a value investor who runs a concentrated portfolio (Ackman would fit this bill, just like Buffett, Munger, etc), is it the future for these investors? These investors are very confident with their call so does it make sense for them to leverage returns further by betting in the same direction as their main stock holding? Note that Warren Buffett has often used convertible bonds alongside his stock positions. The classic example is GEICO, where he owned both the stock and the convertible bond (if I'm not mistaken). Is the use of swaps something similar or not?

I'm curious how all this will work out in the end. The big difference with derivatives obviously is that you have no direct economic interest or control over the underlying entity. Pershing Square seems to always buy a stock (in the case of BGP) or short a stock (in the case of MBIA) while entering the swap positions, so they still have control over the business. But their potential profits and losses are far greater than their economic interest (i.e. stock position). If the stock declines, a conventional equity-only investor can sit and wait for the situation to improve; someone using swaps (bullish position) are going to take big losses if the stock price drops. In the cited example, if BGP drops below $9.99, the stockholders can wait and hold, but Pershing Square will take losses.

Or is this strategy (i.e. using swaps alongside stock positions) only a fancy scheme for activist investors? Note that many activist investors only take a small position in a business while attempting to project influence far greater than their ownership position. So leveraging any positive result from small changes is very attractive for them.

It remains to be seen if other "value" investors start using derivatives in the future?



(On another note, if I feel like it I'll critique his letter to the rating agencies about the monolines in a future post. The big thing I notice is that, although his criticism is strong and worth considering, he is using market prices to draw conclusions (completely against Whitman and Eveillard were saying in my prior post). Rating agencies are supposed to evaluate the credit quality of a company. The fact that, say, MBIA's surplus notes plunged after issuance means little (MBIA got the capital; it's down to what they can do with that)).