'Alpha Wolf' Ackman Rules The Hedge Fund World

Jan 6 2015 | 6:46am ET

Vindicated

In 1992, at age 26 and right out of business school, he started his first fund, Gotham Partners LP, with Harvard classmate David Berkowitz. The partners had early successes, but a series of misfires caused them to wind down the firm in 2003.

Ackman launched one of his best-known attacks while at Gotham. In 2002, he accused MBIA Inc., a triple-A-rated bond insurer, of being insolvent and shorted the stock. For five years, virtually no one believed him. Finally, in 2007, the financial crisis exposed MBIA’s troubles. The company’s stock collapsed, and Ackman, vindicated, made millions. By then, he was on to Pershing Square, which he had founded in 2003 with $50 million in seed capital from Leucadia National Corp. Since then, Pershing Square has generated annualized returns of 21 percent.

In His Element

“The reason why people think we are controversial is because we are doing stuff that just looks different,” Ackman says one afternoon at Pershing Square’s headquarters in midtown Manhattan. “You can’t make a lot of money doing what everyone else is doing.” The view from this space is breathtaking, a straight shot over Central Park to Harlem. Here, he is in his element. He talks fast; he’s intense, leaning in when he’s emphasizing a point, not breaking eye contact. He clearly gets energized talking about investing ideas that are perceived as unusual or offbeat.

“People buy debt in bankrupt companies; they don’t buy equity,” Ackman says as he recounts the story of how, in 2008, he began buying shares in a failing mall operator, General Growth Properties Inc., for 34 cents a share. Pushing it into Chapter 11 bankruptcy, Ackman restructured the company. He moved a group of its properties into a new entity under the name Howard Hughes Corp. Pershing Square sold its stake in General Growth last February and still owns Howard Hughes. The firm has netted more than $3 billion on an initial investment of $60 million.

Extensive Research

Pershing Square, for all the money and the media attention, is a small place. There are 65 employees. Many at the firm have known Ackman and one another for years. They stick together; they defend their boss. “There is a view that if you have a high degree of confidence in your conviction that it is arrogance or hubris,” says Tony Asnes, head of investor relations, who has known Ackman for 24 years. “I sense people who don’t know him or are just reading about him in the press think that’s what he must be, but he’s not.”

Ackman’s 12-person investment team meets every Tuesday. “We are always watching great businesses, waiting for the right time,” says Ali Namvar, who has been at Pershing Square since 2006. Last winter, Namvar helped Ackman score a quiet win with liquor company Beam Inc., in which Pershing Square had a stake of more than 12 percent. He and a team gave Beam’s management extensive research arguing that the time was right for the company to sell itself. A few weeks later, Beam entered into an agreement with Japanese whisky maker Suntory Holdings Ltd. The deal closed in May, and Pershing Square netted more than $1 billion.

Peculiar Algorithm

It’s easy to miss this amidst the public brawling, but some of the firm’s best investments have been its least contentious: Air Products & Chemicals Inc., Burger King Worldwide Inc., Platform Specialty Products Corp.

Around Pershing Square, there’s a peculiar algorithm: return on invested brain damage. As in, is this deal worth the headache? Target Corp. wasn’t. At one point, a fund Ackman set up (separate from Pershing Square) to invest in the company had lost 90 percent of its value. Ackman apologized to his investors in 2009 and offered to waive fees in his main funds until they made their money back. JC Penney, another failure, cost Pershing Square $473 million in 2013.

Then there’s Herbalife. It’s produced huge headaches, but the story is changing. Ackman took his $1 billion short position in late 2012. Icahn, Loeb and other investors ridiculed him and bought the stock. The shares rose throughout 2013, even as Ackman declared the company a fraud. Ackman estimates that at one point, he was down $760 million. It was widely reported that Loeb briefly set up his Bloomberg terminal message greeting as “New HLF Product: The Herbalife Enema administered by Uncle Carl.”

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