The Only Public Hedge Fund You Should Own
Companies / Hedge Funds Feb 27, 2015 - 01:22 PM GMTBy: Money_Morning
Hedge fund managers who offer shares to the general public have lost investors billions. Och-Ziff Capital Management Group LLC (NYSE: OZM) has lost over half of its value since its debut during the financial crisis. Fortress Investment Group LLC (NYSE: FIG) has lost three quarters over the same time period. But there is one hedge fund that just might live up to the hype. I'm going to tell you about it here.
Mind you, if you have $10,000 or more to invest, you can skip the whole hedge fund hoopla and invest in so called "liquidity products." These are hybrids between hedge funds and mutual funds – essentially, hedge funds that are registered with the Securities and Exchange Commission. Blackrock, Deutsche Asset Management, PIMCO and a host of others have been pumping these out in recent years.
Or, if you're determined to get alternative asset exposure, you could invest in one of the private equity firms that went public around the time of the financial crisis. The Blackstone Group LP (NYSE: BX) has treaded water, falling far behind the S&P and notching an 8%-plus gain since it went public. KKR & Co. LP (NYSE: KKR) has actually notched a 142% return since its IPO, beating the S&P handily.
But the ranks of profitable hedge funds with public shares are very thin – until now.
The Activist Investor to Watch
Between January 1, 2004, and June 30, 2014, Pershing Square Holdings Ltd. (AMS: PSH), activist investor Bill Ackman's longest-standing, privately held fund, generated a 20.8% annualized return. This equates to a 626.7% cumulative return over that period, a whopping 13.1% better per year than the return on the S&P 500 during the same time.
In 2014, Ackman's fund was one of the top performing large hedge funds (over $5 billion in assets) in the world with a net return of 32.8%.
These are the kind of outsized gains usually unavailable to the "average" investor locked out of the high-roller hedge-fund world.
But for the last eight years, a few brave fund managers have started to change the game, and let the little guy in for the ride.
Playing with "Other People's Money"
Hedge fund managers, like many denizens of Wall Street, love to play with other people's money, especially if those people cannot demand it back. Average investors normally aren't able to invest in hedge funds unless they meet certain net worth and income tests. Ackman, like Fortress's Wes Edens or Och-Ziff's Daniel Och, decided to get around this stricture by raising equity through closed end funds so investors could not pull it out at their whim.
In 2013, Ackman's performance badly trailed the S&P 500 due to well-publicized problems with an investment in J.C. Penney & Co. Inc. (NYSE: JCP) and a short position in Herbalife Ltd. (NYSE: HLF). Mr. Ackman's fund was only up 9.3% when the S&P 500 was up over 30% in 2013.
Most investors stuck with Ackman, but he wisely decided that it would be better to try to raise permanent capital in the public markets.
So in October 2014, Ackman offered shares in a closed-end fund to individual investors in a public offering on the Euronext exchange in Amsterdam at $25 per share.
The fund is called Pershing Square Holdings Ltd. (OTCMKTS: PSHZF), with Ackman raising $2.7 billion after increasing the size of the original offering from $2 billion.
In addition to the offering cash infusion, institutional investors invested an additional $1.713 billion in the offering. At closing, the fund's stable institutional-quality shareholder base included over 300 sovereign wealth funds, pension funds, endowments, foundations, funds-of-funds, family offices, and high-net-worth investors.
No single shareholder is permitted to own more than 4.75% of the fund, which is ironic in a fund managed by a well-known promoter of shareholder rights, but also supportive of liquidity in this type of structure. The closed-end fund, in addition to previous offerings, gives Ackman $4.4 billion of permanent capital that he can invest on a long-term basis.
At the end of January, PSHZF had total assets of $6.6 billion. At that time, Ackman's firm was managing a total of $18.5 billion, which means that about 1/3 of his funds are now permanent capital that cannot be withdrawn from investors. Share price of PSHZF was $26.53 per share at January 31, 2015.
Ackman runs highly concentrated portfolios where he pursues an activist strategy in which he is engaged with management to improve shareholder value.
The Holdings in the Fund You Can Own
Based on recent SEC filings, Pershing Square owns 5% or greater positions in the following public companies:
Allergan Inc. (NYSE: AGN) – This is by far Pershing Square's largest position representing 34% of the portfolio. AGN is a multi-specialty healthcare and pharmaceutical company that has grown primarily through acquisitions.
In 2014, Pershing Square joined with AGN in a highly publicized effort to acquire Valeant Pharmaceuticals Internationals Intl Inc. (NYSE: VRX). This effort ultimately failed as VRX was acquired by another company. During the takeover battle, VRX accused Pershing Square of engaging in insider trading and continues to sue the fund in California based on these allegations. This 34% position is expected to be reduced shortly and the capital redeployed in new activist investments.
Air Products & Chemicals (NYSE: APD) – Pershing Square owns a $3.1 billion stake that comprises 17% of its portfolio. APD is a leading manufacturer of industrial gases that are the building blocks used in a broad range of industries including energy, chemicals, and technology.
Burger King Worldwide Inc. (NYSE: BKW) – Burger King constitutes 8.5% of Pershing Square's portfolio with a stake worth about $1.1 billion. BKW is the world's second-largest fast food hamburger chain as measured by the total number of restaurants. BKW is controlled by 3G Capital, a Brazilian private equity firm. Pershing Square owns about 11% of the company.
Platform Specialty Products Corp. (NYSE: PAH) – PAH represents 5% of the portfolio with a stake worth about $940 million. PAH consists of the following businesses: MacDermid, which has been renamed, a global producer of high-technology specialty chemical products; Chemtura AgroSolutions, a producer of agricultural chemicals and seed treatment products; and Agriphar, an agricultural specialty chemicals company.
Howard Hughes Corp. (NYSE: HHC) – This long-time holding represents 3% of the portfolio with a value of $510 million. Ackman is the chairman of the company. HHC owns and manages a large real estate portfolio. This position was acquired by Pershing Square through an earlier, highly successful investment it made in General Growth Properties Inc. (NYSE: GGP).
Zoetis Inc. (NYSE: ZTS) – Zoetis is a new position with a value of $1.8 billion representing about 10% of the portfolio. Zoetis is a global animal health company that was spun off from Pfizer in 2013.
Pershing Square also owns small positions in Fannie Mae and Freddie Mac. Unlike its other positions, I believe these positions will prove to be rare losers for Ackman although based on his track record he will not give up on them easily.
Pershing Square has a well-publicized short position in Herbalife that is reported to be about $1 billion in size. Ackman has mounted what can only be called a public crusade against HLF's business practices, which he has termed fraudulent. Other prominent investors including Carl Icahn have opposed him and own significant stakes in the company. Ackman has structured this investment through options to limit his risk.
The One Profitable Public Activist Investor
There are many compelling reasons to invest with Ackman but I would point to two that stick out for me.
First, he learns from his mistakes.
While most of his large activist investments have worked out well, he has had two well-publicized failures in the retail industry over the last few years – JCP and Target Stores Inc. (NYSE: TGT).
He wisely backed away from JCP in early 2014 after it became obvious that his plans for the company would not work out and has now said that he is unlikely to make any new retail investments based on his previous failures.
A wise investor is one who learns from his mistakes and doesn't repeat them.
Second, he is a strong capital allocator.
When he first bet against HLF, he just shorted the stock and the position moved sharply against him. He then restructured the position using options to limit his downside.
Ackman also has a history of using credit default swaps to hedge his portfolio and is an experienced credit investor as well. His ability to invest in both the debt and equity of a company, as he did in GGP, has served his investors well.
Investors looking for a way to compound their capital at a high rate over a long period of time should jump at the chance Ackman has given them to invest side by side with some of the largest and most sophisticated institutions in the world.
Source :http://moneymorning.com/2015/02/27/the-only-public-hedge-fund-you-should-own/
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