Pershing Square Fund's Total Return Approaches Negative Territory

 | May 13, 2016 | 12:10 PM EDT
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This article, originally published May 11, has been updated to note Pershing Square's closed-end fund is nearing negative returns, not the entire return of Pershing Square investments since the firm's 2004 establishment. Video commentary and performance metrics from Pershing's individual investments have also been added.

There's no question billionaire activist Bill Ackman's hedge fund, Pershing Square, needs to chart a new course -- especially as the total return on its latest fund is closing in on negative territory. 

Coming off its ugliest year in history, Pershing's closed-end fund posted another dismal quarter this week, detailing a host of flops in a letter to shareholders Wednesday, along with news that Bill Doyle -- a member of Pershing's management team -- will step down. (Doyle joined the investment team in 2014, after serving as a part-time senior adviser the prior year.)

The fund posted a 25.6% net loss on the quarter, following a 20.5% net loss of all fees in 2015. The loss last year was primarily driven by an SEC investigation into Valeant Pharmaceuticals' (VRX) accounting, as well as the media and political spotlights brought against its exorbitant drug pricing. Its departing CEO, Michael Pearson, recently apologized for these issues before the Senate Special Committee on Aging.

The steep loss brings the return on Ackman's fund to just 0.2%, net of fees, since its December 2012 launch vs. a 55.2% return in the broader S&P 500.

Valeant, the troubled Canadian drugmaker, was the biggest determinant in weighing down Pershing's return, accounting for 16.2% of the loss for the quarter, followed by Ackman's long position in Mondelez (MDLZ) and short position on Herbalife (HLF) dragging the fund's returns down $3.5% and 1.4%, respectively.

The biggest flops in terms of media attention were clearly Valeant and Herbalife. The drama at the latter proved worthy of its own red-carpet documentary premiere at the Tribeca Film Festival last month, as Real Money reported. 

Valeant's new CEO, Joseph Papa, has repeatedly underscored the company's renewed imperative to focus on patient concerns above the optimization of shareholder values. (Valeant's management reshuffle has also included the recent induction of Ackman and Pershing's vice chairman, Stephen Fraidin, to the board.)

"It will take time for Valeant to regain its stakeholders' trust," Ackman said in his letter to shareholders Wednesday. "We believe that this will occur over time as the company delivers several new quarters of results and continues to fulfill its commitments to shareholders, patients, doctors and the community at large. Over time, under Joe's leadership, we expect the market to rerate Valeant to a substantially higher valuation reflective of its underlying business."

On the Herbalife front, Ackman doubled down on his belief that the nutrition-products distributor's business model equates to a "pyramid scheme" and that the market will ultimately react properly.

"We continue to believe that HLF's share price assigns little to no downside for a material adverse regulatory outcome, nor is it justified by a business of HLF's poor quality," Ackman said. "As a result, we believe that HLF currently represents an extremely attractive risk-reward for short sellers."

Ackman publicly announced a $1 billion short posiiton in Herbalife in December 2012, igniting a long-standing and heated standoff. He alleges Herbalife's business model is a "criminal" enterprise that preys on low-income Latino communities in a pyramid recruitment system, in which few employees make a profit selling Herbalife products. Herbalife, meanwhile, has countered that Ackman is a "reckless gambler" who cannot materially back up his charges.

Herbalife shares have risen 129% since December 2012 lows, and roughly 43% since before Ackman's short position was presented.

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