market folly

Continuing our series of hedge fund profiles and biographies, we turn our attention now to Bill Ackman of Pershing Square Capital Management. This is the third biography in our profile series where we've already covered hedge fund legend Julian Robertson of Tiger Management and also Lee Ainslie of Maverick Capital. (We also covered Robertson's big inflation bet as well).

Today is essentially 'Bill Ackman day' here on the blog as we also just covered Pershing's portfolio this morning. So, let's get right into it.

Background

Nowadays, Ackman runs Pershing Square, a well known value/activist based hedge fund that started in 2003. But before Pershing, there was Gotham Partners. He co-founded Gotham with David Berkowitz right out of business school and was forced to shut down around a decade later. They started with only $3 million in seed capital and would eventually garner investments from the who's who of the investment world. Gotham's investors included Michael Steinhardt, Seth Klarman, Leon Levy, Jack Nash, and the Ziffs. They saw 40% annual returns and life was good. At its peak, Gotham had around $500 million in assets.

However, Gotham would then invest in some illiquid assets and found themselves dealing with problems concerning investor redemptions. Ackman and Berkowitz then wound the fund down. Additionally, they would eventually become subject to investigation for possible illegal practices but they were found to have committed no wrongdoing. Ackman went on to form Pershing upon Gotham's dissolution. He started it in 2003 with $54 million in seed capital from only three investors. Nowadays, Pershing manages over $2 billion. Since 2004, Pershing Square has seen a 24% annual return according to Hedge Fund Research (as of 10/14/10).

Ackman received both his degree and his MBA from Harvard. He graduated magna cum laude in 1988 and graduated from Harvard Business School in 1992. Interestingly enough, Ackman is buddies with Whitney Tilson from Harvard. We've tracked Tilson in the past, as he is a fellow hedge fund manager (T2 partners). Portfolio revealed an intriguing story of how Tilson told Ackman to check out the company Farmer Mac on the long side, back when he was still managing Gotham. Ackman liked Farmer Mac as a play, but as a short instead. Thereafter he published a report entitled 'Buying the Farm' where he publicly disclosed his research and the fact that he was short. He was right, and he profited handsomely from its decline.

Investment Strategy/Methodology

Through presentations, investor letters, and just flat out tracking Ackman for a long time, we've gotten a great sense as to how Pershing runs their portfolios. The first (and most obvious) point is that they run a very concentrated portfolio. They like to focus on their best ideas and typically focus on 8 to 12 companies while always on the lookout for other opportunities. They like to say that they only need "a handful of new ideas per year." Their main goal is to generate long-term returns while avoiding permanent loss of capital. But then again, those are pretty typical goals for an asset manager. For their core funds, they try to avoid leverage but are not opposed to using options. And, that is very much the case in their Pershing Square IV fund which invests in Target common stock and options. They like to use options in activist scenarios where their influence can reduce the risk associated to the timing of options and typically use longdated, in the money contracts.

Longs

In terms of what they look for in investments, Pershing focuses on businesses that can generate free cash flow which are also trading at discounts to their intrinsic value. Additionally, they like to see companies with low financial leverage. Their entrance into General Growth Properties (GGWPQ) obviously contradicts this. However, they are playing this more-so for the distressed and event driven side of things as they walk with the company through bankruptcy.

Pershing often also takes activist stakes in the companies they are investing in. Prime example: Target (TGT). Ackman likes to get in there and create value for shareholders so they have more control over the outcome. Unfortunately, things with their Target position have been an uphill battle, to say the least. A great quote from Ackman has arisen from all the Target hoopla. He states, “The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.’’

Shorts

On the short side of their portfolio, they like to focus on absolute return by examining companies with bad businesses. They look for companies reliant on the markets for liquidity, companies with poor earnings, accounting issues, and other flaws as a red flag and an opportunity to short. One interesting thing to note about their shorts is that they often like to use derivatives to put on their positions as a means to maximize the reward of the play. As Pershing puts it, they look for their shorts to be "situations with asymmetric risk-reward profile, what we call a 'ceiling on valuation' ".

Lastly, we want to also point out that Pershing typically has over 20% of the assets under management (AUM) invested in 'cash' or Treasuries. At the heart of the matter, Pershing is an activist investor that seeks to institute change at various companies to generate value.

Portfolio Movements

The past few years, he has had notable short positions in the bond insurers such as MBIA (MBI) and Ambac (ABK). But, he has since closed those shorts. He also detailed his plans for Target to spin-off its real-estate to unlock value. His Pershing Square IV fund, which invests solely in Target (TGT), has seen poor performance (as Ackman apologized for in one of their investor letters). So far, it has been an uphill battle with Target in regards to instituting change at the company. He recently failed to get his board of directors elected as he staged a large proxy fight against the company. However, Ackman is not giving up on this name and will continue to fight for change at Target. Target is still their largest position due to their Pershing Square IV fund. We examined Pershing's portfolio earlier today as a part of our hedge fund portfolio tracking series.

In terms of other portfolio positions, we saw that they have a large position in EMC (EMC) and in the first quarter of 2009 added new stakes in Yum Brands (YUM) and Apartment Investment & Management (AIV). In terms of positions they sold completey out of, they have recently sold their Dr Pepper Snapple (DPS) shares and their Wendys Arbys (WEN) shares.

In past interviews, Ackman has stated that he is, "long-term bullish on America but not on things turning around in the next few months, or even 12 months. We've had the equivalent of a heart attack, but now we are in recovery, hopefully. It takes time to heal."

Performance

Pershing Square's main fund was up 0.2% for the month of May 2009 and was up 1.2% for the month of June. They are now up 10.5% net year to date for 2009. In terms of positions that are each larger than 0.5% of the portfolio, they have 9 longs and 3 shorts. Additionally, they have around $900 million of notional exposure to credit default swaps. On a relative basis, Pershing escaped 2008 without too much of a dent. Their funds beat the indexes, but still lost money, as they were down around 11-13%, depending on the fund.

Resources

Lastly, we'll finish up with a list of resources we've collected regarding Bill Ackman's Pershing Square:

- Pershing's General Growth (GGWPQ) Presentation @ Ira Sohn Conference

- Bill Ackman's interview with Charlie Rose (4/24/09)

- Bill Ackman talks GGWPQ & TGT


In an interview with Portfolio, Bill Ackman said he was an "extremely resilient person." And, hopefully our biography has given you a bit more background and sense as to why we track his movements here on Market Folly. If you enjoyed this post, then consider getting our free updates via email or you can also get our free updates via RSS reader.