Bill Ackman is one of the most influential investors on Wall Street, and the billionaire's Pershing Square Capital Management hedge fund has been at the forefront of some huge activist-investing battles over the years. Yet despite Ackman's long-term reputation within the investment community and his past track record that includes several major successes, investors typically focus on what money managers have done for them lately. Ackman's high-profile missteps more recently have put a dent in Pershing's returns, and investors in the hedge fund are apparently losing confidence in the billionaire investor's ability to bounce back from adversity.

What's happening at Pershing Square

A substantial number of investors, including some extremely large investment companies, have asked to take withdrawals of their money at Pershing Square, according to reports from The Wall Street Journal. Among them is reportedly private equity giant Blackstone Group, which has been with Pershing Square for a long time, and the reports indicate that JPMorgan Chase has started to advise its clients that it won't recommend Pershing Square as an investment option any longer.

In response, Ackman is reportedly retrenching, cutting back on Pershing Square's staff and choosing not to take active steps to court new investors to the hedge fund. As the WSJ report notes, that will leave a substantial portion of assets in the publicly traded Pershing Square Holdings (NasdaqOTH: PSHZF), along with a limited amount of assets representing Ackman's own personal holdings and those of continuing partners.

Wall Street street sign in front of New York Stock Exchange.

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Where Ackman went wrong

Many investors won't remember the big successes that Ackman scored for Pershing Square investors in the past. From 2008 to 2010, the hedge fund earned an average of 16% per year, a particularly impressive showing for a period that included the 37% crash in the S&P 500 during the Great Recession year of 2008. Particularly noteworthy was the billionaire's investment in ailing real estate investment trust and mall owner General Growth Properties, which was able to emerge from bankruptcy intact and has since enjoyed sustained strong performance. Pershing was also an early investor in the turnaround of Wendy's, which involved spinning off its Tim Hortons unit in Canada and produced substantial profits.

Unfortunately for Pershing Square investors, Ackman has found himself on the losing side of several major activist battles over the past several years. For five years, Ackman had bet against Herbalife, engaging in vociferous arguments against fellow activist investor Carl Icahn. Icahn proved to be correct in his bullish view on the nutritional supplement specialist, and Ackman finally gave up on his short bet earlier this year.

Ackman has also made missteps on the bullish side of the spectrum. His calls supporting Valeant Pharmaceuticals International led to massive investments from Pershing Square in the controversial pharmaceutical stock. Even as other investors jumped ship, Pershing Square remained invested until 2017, bearing about $4 billion in losses. The Valeant position was largely responsible for double-digit percentage losses for the hedge fund in both 2015 and 2016, as investors missed out on the huge run-up in the overall stock market during that period.

A lesson for average investors

Many typical investors see hedge funds as the cream of the crop of Wall Street investment companies, offering chances to get in on deals that ordinary investors can't. It's true that large institutional investors have opportunities that you're unlikely to get on your own, but that doesn't mean that success is guaranteed. As Ackman has found, being able to take outsized positions involves taking on added risk as well, and sometimes, that risk outweighs the potential rewards that turn out not to be in the cards.

It's too early to count Ackman out despite the WSJ report, and it's entirely possible that the billionaire investor will bounce back in time even if most Pershing Square investors don't give him another chance to manage their money. Yet the lesson that every investor can learn from this episode is that even the most influential and successful investors can make massive mistakes, and when losses get too big, they can put your entire financial survival in danger. Smart risk management is essential to avoid letting small mistakes turn into massive disasters.