Mar 15 2016 | 10:45pm ET By Svea Herbst-Bayliss (Reuters) - Hedge funds on Tuesday lost an estimated $5.3 billion on drug maker Valeant Pharmaceuticals' stock meltdown, with billionaire investors William Ackman and Jeffrey Ubben taking the brunt of the hit - losing more than $700 million each, according to data from research firm Symmetric.IO. Shares of Valeant, one of the industry's most widely-owned stocks, tumbled more than 50 percent on Tuesday to about $33 after saying it risked defaulting on its $30 billion debt. The company's stock has dropped from a high of $263.70 in August as it faced growing scrutiny, including federal probes, over its drug pricing and distribution practices. Ackman's $12 billion Pershing Square Capital Management and Ubben's $14 billion ValueAct Holdings, which invest for large clients including state pension funds, are two of Valeant's largest investors with directors on its board. While their estimated losses are among the largest, the fallout could be more severe for some smaller managers who made more concentrated bets on the Canadian drug company, investors, managers and analysts said. "For smaller funds, and not that we wish this on anyone, this has the potential to be an event that puts them out of business," said Daryl Jones, director of research at Hedgeye Risk Management. Ackman's fund, Valeant's third largest investor with 16.5 million shares, lost an estimated $776 million on Tuesday while Ubben's fund, Valeant's fourth largest shareholder with 14.9 million shares, lost roughly $701 million. The estimates are based on share counts from the end of December. At least five smaller hedge funds had tied up 20 percent or more of their capital with the company as of the end of December, according to Symmetric.IO, betting that it could turn its fortunes around. Brave Warrior Advisors has one quarter of its roughly $3 billion invested with Valeant and lost an estimated $292 million on Tuesday, if its position remained unchanged from the end of December. At Brahman Capital, which also has more than one quarter of its money invested in Valeant, the losses are estimated at $379.5 million on Tuesday alone, if the fund still owns the 8.1 million shares it reported at the end of December. None of the firms responded to requests for comment. Hedgeye said that Valeant is "not investable" after its disclosures on Tuesday, which included slashing its 2016 sales and earnings outlook and missing a deadline to file its annual report. Pershing Square's Ackman told his clients in a letter that he expects banks to grant Valeant a waiver, but warned that "the potential for a default creates enormous investor fear." Late last year, the mood was very different for Valeant, said investors, who watched the stock tumble some 70 percent from its August highs and decided the company was oversold. Okumus Capital, which added Valeant in the fourth quarter, lost an estimated $87 million on Tuesday, if it still owned the stock. Senzar Asset Management, which also added Valeant in the fourth quarter, lost an estimated $60.7 million. Tyrian Investments, a fund that managed $870 million at the end of December 2014 according to a regulatory filing, lost an estimated $8 million on Tuesday with Valeant. The funds did not return calls seeking comment. The funds' decisions to raise their bets late last year might seriously harm their credibility with investors who are getting nervous after many lost money last year and started 2016 with fresh losses. "Consultants will likely be forced to recommend clients to redeem completely from those funds where Valeant resulted in a significant capital impairment," Hedgeye managing director Thomas Tobin wrote on Tuesday. From FINALTERNATIVES
Ackman's $12 billion Pershing Square Capital Management and Ubben's $14 billion ValueAct Holdings, which invest for large clients including state pension funds, are two of Valeant's largest investors with directors on its board. State pension funds....yep just invest that pension fund money into real risky assets...
in their mind state funds have no choice because they are vastly underfunded and their assumed rate of return is unrealistic. Illinois is the prime example and eventually they will default.
Yes, a hedge fund averaging down or holding on to a loser is no different than a private investor doing the same, except the hedge fund simply has more funds to lose. Valeant's stock price started its decline awhile back, so it's no surprise that it would gap down on a negative news event. The hedge funds had lots of time to exit, but they didn't.
Indeed. Thank Bernanke and his perpetual ZIRP...And just yesterday some guy said "who cares" about ZIRP/NIRP...so the pension funds will eat some big losses and the politico's will look towards the taxpayer's to "make things right".
I remember in 2008-09 several of the investment "geniuses" were exposed and continued to add, add, add to losing positions...The difference is that it is OPM and if it does indeed blow-up...well, "no one saw it coming" was the common refrain. Of course, I'm sure many of those investments have gone on to huge gains since then, but these guys do have the resources (in some cases) to get away with it.
yeah, but these aren't widows and orphans... sure, the pensioners have no say in the inv. committee's decision to invest in a concentrated activist fund, but the pension is underwritten by the local/state/federal govt. I can't imagine an AI or investment committee stating that any of this is a shock; style-drift, etc. You own 5-6 stocks in which you're filing 13Ds -- you can assume that CALPERS knows wtf is going on at the fund.
Falling in love..., and marrying a position As most often happens - ends in heartache Stops..., aren't necessary for just us piss ants RN
The FT has an interesting article, "The boardroom bust-up behind the worst day in Valeant’s history" (google and click through to avoid pay wall). Bottom line: These hedge funds (ValueAct and Pershing), through their representatives on VRX board, are involved in setting guidance for the company - and they disagreed. Ackman wanted VRX to guide more positively. Ackman did not double down on VRX with shares, but with a web of derivative trades (buying calls, selling puts) http://www.bloombergview.com/articl...n-found-a-cheap-way-to-buy-more-valeant-stock I don't know when these option positions expire, but in my opinion it is highly questionable when option holders like Pershing are in a position to determine or influence guidance. At the end of the day, it is reality that determines stock prices and not guidance. But guidance can help or hurt short term, and that is what counts with options. BTW Matt Levine's article has a nice chart that shows that Pershing's mark to market losses from VRX are sitting around 4b now, that's huge even for a hedge fund of this size.