market folly

Bill Ackman's hedge fund firm Pershing Square Capital Management returned 15% gross and 12.2% net for the month of November and has returned 35.5% gross and 27% net for 2010. Fantastic numbers, no? Given the somewhat outlandish results in one month, it's not necessarily a surprise that skeptics have emerged. It's perfectly acceptable to be skeptical/suspicious/curious given the cloud of secrecy that largely surrounds the hedge fund industry. However, when skeptics don't know how to track a hedge fund properly, their argument immediately loses credibility.

So, what's all the fuss about here? We hesitated even bringing this up for fear of drawing further attention to the article, but we couldn't bear it any longer. Earlier, Dealbreaker reported Pershing's performance numbers. Then, a site called Insider Monkey published an appalling article and the shit hit the fan. After "analyzing" the returns of Pershing Square's investments in November, Insider Monkey concludes that, "either Ackman made another secret investment which returned a gazillion percent or... Dealbreaker was duped."

First and foremost, any reader of Dealbreaker knows that the site posts performance updates directly from top hedge funds from time to time (i.e. printed on the hedge fund's letterhead). So, for Insider Monkey to insinuate that Dealbreaker posted up a 'duped' document is a bit asinine considering Bess Levin's pristine track record of posting authentic material. Bess is probably straight up laughing at Insider Monkey's insinuation. Next: onto the important stuff.

The crux of Insider Monkey's misstep is that they completely failed to assess Ackman's FULL portfolio. This highlights rule number one when tracking hedge funds: never rely solely on the 13F filing. If they had also read Ackman's various 13G's, 13D's and Form 4's filed with the SEC regarding Pershing's position in General Growth Properties (GGP), they would have realized where the bulk of the fund's performance came from and wouldn't have penned that nonsensical article.

A cursory look over the hedge fund's other SEC filings reveals that GGP emerged from bankruptcy on November 9th and obtained $6.8 billion in new equity capital and restructured $15 billion of debt. Pershing Square owned GGP equity and GGP unsecured debt. Additionally (and probably most importantly), Pershing Square purchased 46 million shares of new GGP at $10 per share and warrants as part of the restructuring (with shares now trading around $16).

So voilà, there's your answer. Insider Monkey was using a 13F filing that disclosed positions as of September 30th to determine a hedge fund's performance when one of the fund's main holdings saw a major corporate event a month after the 13F was filed, altering their position size. While Insider Monkey makes note of GGP's spin-off of the Howard Hughes Co (HHC), they completely fail to recognize the full extent of Ackman's position in the various securities of the company. Needless to say, Ackman owns much more GGP/HHC than what is reported on the latest 13F filing.

Not to mention, they completely omit the fact that Ackman holds other assets that SEC 13F filings don't require disclosure of. Assets falling into this category that Ackman owns include cash settled total return swaps and stock options, real estate hedges (via short sales and/or other non-disclosed positions), as well as a past position in BP (BP) credit default swaps. Lastly, Ackman could possibly hold various debt positions as well.

On their Seeking Alpha article, commenters have also pointed out Insider Monkey's misstep. What's comical is that after this revelation in the comments, Insider Monkey claims, "it looks like our conclusion is correct," referring to their conclusion that, "Ackman made another secret investment which returned a gazillion percent."

Umm, no. There was NOTHING secret about this investment (or any other investment that could have contributed to Pershing's performance). Within our article alone, we've already linked to Ackman's updated aggregate economic exposure to GGP, his various stock options plays, as well as updates on all of his portfolio holdings. Again, it just goes back to Insider Monkey's complete lack of attention to detail. Had they simply read the various SEC filings made by Pershing not titled 13F, they would have found their answer as Ackman disclosed the extent of his aggregate economic exposure (and reason for the bulk of his strong performance) long ago.

So, what has Insider Monkey's folly taught us? It reinforced the fact that when tracking hedge funds, you have to take 13F filings with a grain of salt. Additionally, you have to track the full gamut of information (all SEC filings, investor letters, presentations, manager comments etc). This is what Market Folly strives to do on a daily basis. We simply wanted to use this as an opportunity to present a lesson in hedge fund tracking and why it's important to track MUCH more than just a fund's SEC 13F filing.

Based on this, we'll be launching a series of educational articles on the various aspects of hedge fund tracking and how to do it, so stay tuned! In the mean time, scroll through all of our coverage of hedge fund portfolios here and remember that MarketFolly.com is your go-to source for the full spectrum of hedge fund analysis.