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Pershing Square’s Amazing Returns Cause an Internet Dust-Up

Published: Tuesday, 7 Dec 2010 | 12:27 PM ET

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By: John Carney
Senior Editor, CNBC.com

In a month that was supposed to be one of the toughest for hedge funds, Pershing Square Capital Management reportedly saw a 12.2 percent net gain—and a 15 percent gain before fees.

This capped off a stellar year for the hedge fund, which is run by Bill Ackman. It is reportedly up 35.5 percent before fees for the year. The returns were first reported by Bess Levin of DealBreaker, a site that frequently posts hedge fund returns.

(Full disclosure: I was the editor-in-chief of DealBreaker from early 2006 until 2008, when I handed over the reins to Levin, who had been my colleague there since mid-2006 and remains a personal friend.)

In the post-Madoff era, those kind of returns will—and should—prompt skepticism. How could Ackman produce those kind of gains?

This question sent a website called Insider Monkey digging into the SEC filings. What it found is an example of the value and dangers of investigating the returns of hedge funds.

Here’s the post from Insider Monkey:

So…. we went through each long stock holding reported by Bill Ackman in his latest 13F form. Total assets reported were about $4 Billion. The largest position in the fund is Kraft Foods (KFT) with $852 Million at the end of September. KFT lost 4.8% in November. The second largest position in the fund is Target with $756 Million invested. Target (TGT) returned 7% in November. Next is Citigroup (C) with $571 Million invested. Citi returned 1.2% in November. The fourth largest position is JC Penney (JCP) with $427 Million at the end of September. JCP returned 6.9% in November.
Do you see where we are going? The only position in the fund that had a greater than 15% return is General Growth Properties (GGP). That company came out of bankruptcy and spun-off Howard Hughes Corp (HHC). There’s a $3.589 per share distribution on November 10th for GGP, which should account for this spun-off. GGP returned 20.2% including this spinoff-related distribution in November. Considering most of the positions in Ackman’s portfolio had a smaller than 10% return in November (with the largest position returning -5%), mathematically Ackman’s portfolio can’t return 15% in November unless he increased GGP’s weight in the portfolio to 70% or so.
Our conclusion is either Ackman made another secret investment which returned a gazillion percent or… Dealbreaker was duped. Pershing Square returned 10.7% for the first 9 months of the year and now Dealbreaker is reporting that the cumulative return for the first 11 months is 35.5%.
Just doesn’t make sense…’sall we’re saying.

It turns out, however, that Ackman’s returns do make sense—if you take account of the fact that not all of its holdings are included in the 13F filing. Market Folly, an excellent site which specializes in hedge fund returns, explains what went wrong:

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.

In short, attempting to second-guess Pershing Square’s returns based on one report is a bad idea. But it also shows us how opaque hedge fund returns are—even to their own investors. Because only certain positions are disclosed—and the disclosures come in a variety of filings—investors basically have to trust that the returns are what the manager says they are.

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Companies mentioned in this post

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