I can't take credit for being the first person to say this, but I definitely share the sentiment - Even now at $18 billion AUM, Ackman still can't (or won't) source his own ideas. Largest percentage returns in a given year =/= greatest HF, necessarily.

[quote=patternfinder]Of course, I would just buy in scales. [/quote] See my WSO Blog | my AMA
 

I'm curious as to what makes you say that?

Also, given Pershing Square's somewhat limited investment universe relative to a $1 billion fund, it becomes harder to come up with a completely original investment idea. GGP was certainly a creative investment. I think it was Chanos who said there are no original investment ideas.

 

I agree with you that highest return # =/= best HF, but I'm not sure it's important for Ackman to source his own ideas. He is managing way too much capital with way too few people to suffer from "invented it here" syndrome in terms of finding undervalued situations. However, he pretty clearly is sourcing his own ideas when it comes to the activist stuff... defcon 1 cleverness on some of these plays, even when they don't work out.

As somebody who does similar-ish stuff on a much smaller scale, I consider finding mispriced opportunities to be somewhat of a commodity at this point. The tactical playbook on gaining control and effecting change in a particular situation is what makes me feel smart and smug everynight when I hit the pillow.

  • Guy who dreams smugly
 

Maybe he doesn't have "original ideas" but he always certainly has an original angle. For example, using Valeant as a catalyst for Allergan stock was brilliant. Herbalife, while still TBD as an investment success, was first brought into the investment community by Ackman. CP, Beam, Platform Specialty, etc were all pretty unique as well. You might argue that there was at least one fund that had the idea first, but as far as original ideas go in the HF world I think Ackman has a differentiated view driven by brand name and scale.

 
thebrofessor:

Klarman > Ackman for getting killer returns and not making a fuss about it.

I don't think that's a fair comparison. Ackman does enjoy the press much more and histrionics and theatrics i.e. Herbalife presentation, but Ackman is an activist investor - how he works with his investments almost require him to be in the corporate spotlight.

 

I think sourcing own ideas or not and rest of the stuff kind of becomes irrelevant when you're doing well and have a good track record. Also nothing wrong in not sourcing each and every idea on your own. Aim is simply to make money.

Speaking of creating a fuss, people tend to do it all the time in private. Buy-side squeezing their equity sales for lower charges; I mean how much lower than 1bps can they go? Ackman and some of the guys mentioned do the same stuff, just in public as well. When they act, markets react.

 

I don't always agree with how he goes about his activist campaigns but I do respect the fact he typically holds ~10 longs in his portfolio - not many investors, especially funds that size, are willing to be that concentrated. Granted, he typically pushes his agenda so that helps with conviction, but still an aspect I respect about Ackman.

 

In retrospect, a solid investment strategy would be to just go opposite of Ackman...

Jcpenny, Herbalife, Valeant...

I did not know he had a prior fund that blew up. Interesting.

Also if you are going to concentrate, you need to do an extreme amount of due diligence. Bronte Capital has a solid rebuttal on Ackman's Herbalife thesis and why he thought it would not work out. Also, look at Valeant's financials around the time he invested. Not sure he put in the work.

The longer I'm in business the more I see an inverse relationship between CEO/PM public appearances and business/investment performance.

 

People love watching winners win and losers lose. I think there was more than a bit of awe among most of us onlookers at the end of 2014. And then VRX comes along and now we're all just waiting for Ackman to blow up. We like to see a show, and doesn't matter if it is good or bad, as long as it's spectacularly good or spectacularly bad. Ackman certainly has put on a show on both ends of spectacular.

I think there may be 10,000 people who try Ackman's investing strategy, and a handful of them will inevitably end up being as large as Ackman, just by law of probabilities. It just so happens Ackman is the top 0.01% that has made it the multi-billion scale.

 

To be sure, I had no real view on Ackman or his strategy broadly... If I were an investor, I would have simply stayed away, since I wouldn't feel that there's a sufficient margin of safety. I would have been neutral otherwise.

However, having learned about his various "excursions" and the most recent VRX options shenanigans, I am slowly coming to the conclusion that he had always been an accident waiting to happen (a 2nd one, at that). Obviously, this is all based on very limited info etc etc.

 

Depends on your definition of "bad", I suppose... My point, in this particular case, isn't about his track record, but rather about the particular trades he had done in this particular instance (the monster seagull in options).

As an aside, I found it really fascinating that Ackman, when he did his VRX options trades, dealt with counterparties whose analysts had the two highest price targets for VRX. Call me a cynic, but it's funny how these things work, innit?

And then the sale of Mondelez, probably at least partly to be used for margin on the short put position... It just doesn't get any better than this, really.

 
Martinghoul:

In summary, having thought about it long and hard, I have to conclude that Ackman, actually, is a terrible investor, regardless of the outcome of the VRX saga.

Agreed. Buying only 10 stocks (and 1 short, I believe) is a terrible strategy. It's akin to just saying "I like to buy stocks that go up". I don't even know how it can be called a strategy. If a college kid did the same thing, instead of a billionaire, that kid would be laughed at.

I honestly wonder what process the LPs did to die diligence this strategy. Shame on them.

 
DickFuld:
Martinghoul:

In summary, having thought about it long and hard, I have to conclude that Ackman, actually, is a terrible investor, regardless of the outcome of the VRX saga.

Agreed. Buying only 10 stocks (and 1 short, I believe) is a terrible strategy. It's akin to just saying "I like to buy stocks that go up". I don't even know how it can be called a strategy. If a college kid did the same thing, instead of a billionaire, that kid would be laughed at.

I honestly wonder what process the LPs did to die diligence this strategy. Shame on them.

Nah brah, 10 stocks is DAF (diverse as fuck). If the guy had real stones he would just do 2 or 3 stocks

 

Anyone think he is doubling down on VRX? He sold 20mm MDLZ shares yesterday and I can’t help but think that he is going the plow the proceeds straight back into Valeant. VRX is absurdly cheap right now (for good reason) at 3x NTM P/E and there is no way in hell that lenders would not renegotiate covenants to prevent a default.

 
contribution margin:

Anyone think he is doubling down on VRX? He sold 20mm MDLZ shares yesterday and I can't help but think that he is going the plow the proceeds straight back into Valeant. VRX is absurdly cheap right now (for good reason) at 3x NTM P/E and there is no way in hell that lenders would not renegotiate covenants to prevent a default.

lol. Ackman already doubled down on VRX. And then tripled down. If he continues to buy, then he has gone full YOLO investor.

 

Looking at Herbalife filings...this entire thing is a pissing match between Ackman and the other guys.

Icahn owns 17m shares (~18%), with a basis of about 33/34 on average, Loeb cashed out a couple million recently, but he was in the top 10 institutional group. Honestly, its almost a short squeeze when someone like that is propping up a fifth of the shares outstanding. Forget how profitable that investment has been for him (trading at 60 today), unless he has some kind of brilliant plan for disposing of the shares, hes stuck with his dick in his hand because profits and cash flows are down double digits since 2013. Only fidelity owns more shares than he does, so unless he finds a way to turn those profits around he might be sitting next to the band when that ship goes down.

Also - take a look at the moves the CEO made over the last two years. His option transactions are ridiculous. He is the bigger winner in this thing with the amount of cash hes pocketing. Plot twist - he invests option proceeds in Pershing Square and is just waiting for the world to come around on Herbalife. "fiduciary duty my ass.."

 

That's how activism works, you buy a stake, try to get a seat on the board and force necessary changes to increase equity value. Activists do not maintain 100 positions with 1% of AUM in each to manage risk.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.
 
Best Response

I highly doubt he took this stake without a future transaction lined up. I personally think the end game here is the break-up of Pepsi, with Frito-Lay merging with MDLZ and the beverage business going to AB-Inbev.

-Peltz is on the board of MDLZ and has wanted a breakup of Pepsi forever (read their white paper) -Peltz said “Bill is a smart guy and recognizes value when it is there” -AB-Inbev has digested the Budweiser deal and probably has the balance sheet capacity for a new deal. -AB-Inbev is run by 3G, who teamed up with Ackman on QSR -MDLZ/Frito-Lay combination would be an absolutely dominant snack business -3G would wring a metric crap-ton of costs out of Pepsi. I don’t think fancy sculpture gardens in Westchester would pass a ZBB test.

The potential hang-up is whether Ackman/3G will poison the well with Buffett by getting opposite of KO. I don’t think this will be an issue – everyone has a duty to their investors to make money.

Twenty five years after Barbarian at the Gates a bunch of rich white guys in Midtown are still haggling about the future of Oreos.

 
Gray Fox:

I highly doubt he took this stake without a future transaction lined up. I personally think the end game here is the break-up of Pepsi, with Frito-Lay merging with MDLZ and the beverage business going to AB-Inbev.

That's my guess. You don't put that much capital to work because you like MDLZ's capital allocation story lol

Peltz has been telegraphing this kind of transaction for some time but it was never going to be a one man job. It'll be interesting to see how this plays out because typically you still need some semblance of management buy in to get something of this scale done vs. using sheer brute activism. There are not many investors out there willing or capable of even trying something this big.

 

Good stuff. I sometimes wish I were in public markets to make plays like this.

Also OP, I'd assume Pershing is levered up. I don't know what funds are getting today or if he gets extra because he's Ackman, but I'd assume at least 3-6x (I knew guys pre-08/09 at the big shops who were 20x long 10x short) so it's not really 25%. And as others have said, activists are different in concentrations because it would be pretty impossible to be 2-3% of $25B (*whatever leverage they can get) and try to enact change.

But I'm not a hedgie so someone correct me if I'm wrong.

 

Multi-manager shops often run super high gross exposures because they are market neutral. $10bn in actual capital, 80 pms running a total of $80bn exposure, 8:1 leverage. Ackman runs a very concentrated, primarily long only book (with the exception of high profile HLF short). It is not really a hedge fund – rather an investment partnership where he still gets 2/20. He could never run his book with that kind of leverage.

Ackman built his position largely through options and forwards (similar to AGN). They look to be slightly in the money or right at the money. Many expired in July. He was able to gain the 7.5% economic exposure without, I believe (not a lawyer), immediately triggering reporting requirements. All derivatives have an inherent degree of leverage in them, but these aren’t super out of the money call options.

http://www.sec.gov/Archives/edgar/data/1103982/000119312515280396/d4584…

More details on his portfolio

https://www.pershingsquareholdings.com/media/2014/09/2014-PSH-Annual-Up…

 
Unforseen:

Oracle

I'd love to see what Larry Ellison would have to say about that. He has 24% of ORCL, which translates to $35bn. Ellison is notorious for how he controls the company (rightfully so given being the largest shareholder by far and the cofounder). I really don't see how Ackman could make any headway there or come up with some kind of better solution than Ellison and Hurd.

 
Gray Fox:
Unforseen:

Oracle

I'd love to see what Larry Ellison would have to say about that. He has 24% of ORCL, which translates to $35bn. Ellison is notorious for how he controls the company (rightfully so given being the largest shareholder by far and the cofounder). I really don't see how Ackman could make any headway there or come up with some kind of better solution than Ellison and Hurd.

Super edit: I'm going with TWX.

I hate victims who respect their executioners
 
BlackHat:
Gray Fox:
Unforseen:

Oracle

I'd love to see what Larry Ellison would have to say about that. He has 24% of ORCL, which translates to $35bn. Ellison is notorious for how he controls the company (rightfully so given being the largest shareholder by far and the cofounder). I really don't see how Ackman could make any headway there or come up with some kind of better solution than Ellison and Hurd.

Super edit: I'm going with TWX.

If Ackman goes in post-run up, he's gonna look like the greater fool, no?

 

I think it might be Ameriprise Financial... undervalued, run as an annuity but with the potential to be far better, overpaid executive management etc.

AMP is my best guess.

The invisible hand
 
monKAY:

I think it might be Ameriprise Financial... undervalued, run as an annuity but with the potential to be far better, overpaid executive management etc.

AMP is my best guess.

It's too small, in my opinion. 17b market cap. He's raising 1b in a special purpose vehicle, plus up to 2b from the main fund.

I am going to guess Intuit, Comcast, or IBM. IBM would be kind of crazy in my opinion (especially given BRK's stake), but he's gone after P&G...

I might even say Cisco, but I don't see a lot of room for activism. They pretty much own the router space. And trying to fight Chambers / mgmt sounds like an uphill battle.

BlackHat:

Super edit: I'm going with TWX.

This would make sense. I don't want to think Ackman would buy a company after a 60% run up over the past year, but I wouldn't bet against it.

 

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