Bill Ackman, manager of hedge fund Pershing Square Capital Management, has made a name on Wall Street as someone who bets big when he has an investment idea. Sometimes his strategies work, and sometimes they don't.
We recently got a peek into Ackman's positions through what's called a "13F" filing, a report of holdings for managers of $100 million or more. Big-time fund managers like Ackman have a lot more sway with companies than you and I because of their billion-dollar positions, but some of these picks can give us insight into companies and help direct further research.
The makings of a bad year
The third quarter was particularly unkind to Ackman, particularly for some of his most high-profile bets. Ackman gave up on the future of J.C. Penney (NYSE:JCP) and slashed positions in Procter & Gamble (NYSE:PG) and General Growth Properties (NYSE:GGP). Note that each of these companies has underperformed the Dow Jones Industrial Average over the past year, meaning an index fund would have been far better for his investors than a high-fee hedge fund.
Let's look at how those investments played out for Ackman in both the short term and the long term.
Ackman and the fall of J.C. Penney
Former CEO Ron Johnson has taken a lot of the flak for J.C. Penney's troubles over the past year, but it's Ackman who was largely responsible for Johnson becoming CEO in the first place. Ackman pushed for the hiring of the former Target and Apple executive and supported Johnson's turnaround plans from his seat on the board of directors. In a lot of ways, Ackman was even more at fault for J.C. Penney's recent downturn than Johnson.
We don't know exactly what Ackman sold his stake for, but his 39.1 million-share stake would have lost $396 million from the beginning of the year to the end of the third quarter alone. That's a big loss on a bad bet in retail. At the very least, it's worth questioning why you should buy J.C. Penney now if someone with such a large stake and an insider position at the company simply threw up his hands and gave up.
Getting out of the detergent business -- sort of
Ackman built a $2 billion stake in consumer goods manufacturer Procter & Gamble in 2012 in an effort to push for change. The company had slowed to virtually zero growth under CEO Robert McDonald, and the stock had hit a wall, which isn't surprising for a company of P&G's size.
Ackman got his way earlier this year when McDonald stepped down and former CEO A.G. Lafley stepped back into his old role. Shares responded with a nice gain this year, but they still haven't kept up with the Dow Jones Industrial Average, and now Ackman is getting out.
However, just because Ackman has sold 76% of his stake in Procter & Gamble doesn't mean he's giving up on the company. He has simply shifted most of his risk into call options, which make money if the stock goes above his strike price but may result in a 100% loss if the stock goes down.
This is an even riskier bet than buying P&G's stock, and it levers Ackman's returns. If the stock goes up, he could have another big winner on his hands. We still need more time to see just how this investment plays out.
Shrinking love for General Growth Properties
The other major sale Ackman made last quarter was 47% of his stake in General Growth Properties. Over the past year, General Growth Properties has gained less than half of what the Dow Jones Industrial Average has, although that doesn't mean it's been a bad investment for Ackman.
This was an investment Ackman made when General Growth Properties was emerging from bankruptcy, and it included warrants, which are essentially long-term call options. Reports have his initial investment at about $60 million in 2008 and 2009, which grew to some $2.3 billion earlier this year. Here's where you see a deal hedge funds can make that simply aren't available to most of us, and now Ackman is cashing out.
After a battle with major shareholder Brookfield Asset Management over a potential sale to Simon Property Group, Ackman agreed to sell his warrants and some of his shares. Based on the size of the reduction last quarter, he's in the process of getting out altogether -- with a tidy profit at that.
You win some, you lose some
In the high-stakes world of hedge funds, the gains can be massive -- and so can the losses. This year, the bad bets are piling up for Ackman's Pershing Square. Bloomberg reported that through the end of October, Pershing Square was up just 7.9%, compared to a 21% total return for the Dow Jones Industrial Average.
Unless Ackman turns things around in two months, it looks like an index fund would have been much better to investors.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.