If Ackman is right that his porfolio is as undervalued as it was in 2009 (And I believe that is likely), his performance is likely to produce over 2000 basis points in excess returns over the S&P500 over the next few years, thats 20% a year in a flat market. Its the combination of the fact that his holdings have been beaten down (as the ackman hate trend kept going) and the no performance fee. Yes there is risk but what the Ackman haters don't understand is that there is reward too. You cant look at risk without looking at reward. Worse case scenario, you own a portfolio of 8 stocks (that are being streched down as the hate continues) and pay 1.5% to do so, hardly a disaster
MDLZ, CP, HHC, ZTS, APD,QSR(burger king) are companies with real business. No matter how much people hate on Ackman, that won't change. Yes, VRX is higher risk, thats why I shorted some to get the exposure down. But, its high reward too, if he is right, the stock is worth $200
And the reasons I like to invest in the fund instead of buying his holdings is 1- Sometimes he does special transactions that you only fully benefit by being in the fund. The whole Alergan thing was a good example. It was a home run trade (and contrary to the critics, it was legal. It was advised by former SEC enforcement director Robert Khuzami. Who knows more a former enforcement director or reporters/idiots on twitter?). 2-If he sells out of a trade, you only find out later and you might end up holding the bag in a bad investment 3-He's got access to special trades like CDS and OTC options. Right now he is betting on a Yuan and Saudi Ryal devaluation through options. I don't get that with buying his stocks. The whole MBIA thing also was done in CDS, not shorting the stock
I have looked at the stats for Ackman's Pershing Square fund (using the latest HSBC HF report). According to the numbers provided there, I see that the following applies: Sharpe Ratio: 0.81 Max drawdown: 36% If I understood the article correctly, to "enjoy" the performance shown above, I would only have to pay 1.5% per annum, at least for the moment until the fund gets back to its high watermark. I am curious... If you left aside things like reputation etc and didn't know it was Ackman, would you be involved? Furthermore,don't you find it strange that you're uncomfortable enough with the fund's investments that you have to "hedge"? As to your specific points: 1. Robert Khuzami or not, the court case was allowed to proceed. Obviously, who knows how it will all end, but, clearly, so far the former SEC enforcement director isn't proving to be a silver bullet. 2. Can't this exact scenario occur w/ your VRX hedge? 3. I dunno, mate. Ackman's periodic forays into macro leave me positively unimpressed. I mean he's a long/short equity and activist investor. That, arguably is his skill, forte, expertise, whatever you like, which makes him a very typical "macro tourist". I dunno about you, but if I were an HF investor, this sort of mandate drift wouldn't really make me feel all warm and fuzzy. In summary, I know nothing about Ackman and I have no strong feelings about him (well, apart from Fannie and Freddie incident, where he really pissed me off). However, given the various tidbits of factual evidence, I certainly wouldn't dream of investing.
Well, you left out what was the reward for taking on that volatility. And the reward was an very strong excess return over the S&P500. He is in the Buffett school of "I rather make a bumpy 15% than a smooth 12%". Buffett himself has had numerous 50% drawdowns in his lifetime, yet he is one of the richest in the world. You cant look at risk without looking at return. And as far as the VRX hedge goes, its simply a tool that I use to get comfortable not only with his fund but with stocks in general. Its simply a fix to a character flaw that I have of not wanting extreme volatility being long stocks at this point in my career. This flaw is unlikely to exist a few years down the line as equity investing is never something I engaged in very deeply but now I'm getting comfortable with. Its better to use these fixes than to join the ZeroHedge school of investing where one sits in cash and gold for 40 years I find that largely irrelevant. His decision to pursue AGN was correct given the massive expected value in the trade and the fact that an SEC expert told him it was legal. If he had to take a small chance of some bs in the judicial system, it was still the right decision I'm not sure what you meant by that Well, you have to consider two things. He knows that macro is not his forte, so he never risk a significant % of capital in these bets. Also, when he DOES bet on it, its usually in something so asymmetrical that it doesn't take a high battling average to produce good returns. I'd argue that's pretty good way to approach trading/investing/speculating in things that you are not an expert on FNMA FMCC is another asymmetrical payoff sort of trade. A lot of people without legal expertise have strong opinions about that but can they honestly say that they believe they will be proven right in the courts with a 95%+ certainty? Because if they don't, its the long side that makes sense
OKI-DOKI, while I can't agree with your logic, I don't think there's any point in discussing the specifics... I wish you the best of luck in this one!