Pershing Square Posts Small Gain In Sept, Big Loss In Assets

Oct 4 2013 | 12:20pm ET

Pershing Square Capital Management broke its two-month losing streak in September, but losses since the first quarter have taken a big chunk out of its assets under management.

The New York-based hedge fund said it returned 0.2% last month, following losses of 2.2% in July and 3.6% in August. The gain leaves Pershing Square up 0.5% on the year, behind both the mid-single-digit returns of the average hedge fund and the nearly 20% return of the Standard & Poor's 500 Index.

Pershing Square did not say which investments put the fund into the black last month, but it holds shares of Beam, Canadian Pacific Railway and Air Products & Chemicals, all of which posted gains last month. The firm also avoided a substantial loss by selling its huge stake in J.C. Penney Co. at the end of August; the struggling retailer's shares plummeted 30% in September. But it did continue to rack up losses on its $1 billion short bet against nutritional supplements company Herbalife. Pershing Square founder William Ackman told investors this week that he had restructured that bet to cut risk.

Still, losses in the second and third quarters—Pershing Square was up 6.2% in the first—have taken some $1.2 billion from the firm. The hedge fund's assets have dropped from $12.4 billion at the end of March to $11.2 billion at the end of September, due almost entirely to investment losses; net redemptions have totaled less than $150 million this year.

In his third-quarter letter to investors this week, Ackman took aim at D.A. Davidson analyst Tim Ramey, who he called "perennially bullish" on Herbalife, which Ackman has called a pyramid scheme. He chided Ramey's prediction that the company would announce a major share buyback and that new auditor PricewaterhouseCoopers would complete its reaudit of the company's financials shortly.

"While September has come and gone without PwC's completion of Herbalife's re-audited financials, bullish investors apparently continue to expect the re-audit to be completed shortly, and a large buyback to be forthcoming," Ackman wrote. "We are skeptical of Ramey's pronouncements."

Yesterday, Ramey shot back, telling The Wall Street Journal, "I will take my record against his. I will take my research on the 'go-to-zero' hypothesis against his."

Indeed, Ramey said in a new research note, Ackman's short bet is the thing that will go to zero.

"If it truly still believes in the go-to-zero thesis, and Mr. Ackman writes in his letter that he does, then it makes no sense to put a time element into this trade," Ramey wrote, referencing the put options that Pershing Square bought, which carry a reported 2015 expiration. "He now needs to be both right on the go-to-zero thesis and right on the timing."

"On one thing we do agree—Pershing Square has significantly reduced the risk of unlimited losses, but has increased the certainty of a total loss of the original $1 billion short position as the puts expire worthless. The counterparty to his trades indeed has a winning hand."

"Clearly, there is capitulation in these actions, and that may well send Herbalife shares much higher."

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