Bill Ackman is simply good at what he does. His company, Pershing Square Capital Management, has crushed the returns of the stock market for its investors.
From 2004 to the end of 2014, Pershing Square generated a total return of 692% net of fees, beating the S&P 500's 132% return.
Even better, Pershing Square put up market-beating numbers despite the fact that it tends to carry a lot of cash on hand -- about 14% of assets on average. The S&P 500, by contrast, is always fully invested in stocks.
Pershing Square's biggest bets
Pershing Square largely employs long-short strategies, meaning it buys stocks it thinks are undervalued, and shorts stocks it thinks are overvalued. Over its history, its funds have managed to lose less of their value than the market when stocks fall, and beat the market when stocks rise.
Pershing runs concentrated portfolios, holding only a handful of stocks at any one time. The logic follows that if Pershing Square is good at picking stocks, it should invest most heavily in what it sees as its very best bets. As Warren Buffett once opined, diversification makes very little sense for those who know what they're doing.
Of course, not all of its investments turn out to be winners. The company lost billions on highly publicized activist campaigns involving retail mega companies Target and JC Penney. In a long and drawn-out battle of words, Pershing failed to convince Target to follow his plan to sell its real estate assets. Poorly timed, its investment at Target would stumble during the financial crisis. JC Penney was receptive to Pershing's activism, installing new leadership, but sales still plummeted.
For every losing investment, Pershing Square has also had its mix of winners. He cleared billions on an investment in Canadian Pacific Railway, insisting that the company fire its CEO and replace board members. Shares tripled in just two years. Similarly, his company profited handsomely by betting against the success of municipal bond insurer MBIA, famously asking the question "Is MBIA Triple-A?" The company would later prove that it wasn't, in fact, worthy of its triple-A bond rating, faltering during the 2008 financial crisis.
Leading in its industry
In a business where success begets assets, Pershing Square's size has afforded it some interesting investment opportunities.
In 2014, for example, Pershing Square teamed up with Valeant to buy shares of Allergan, a company Valeant wanted to acquire. The plan involved Pershing Square silently snapping up a sizable chunk of Allergan shares in tandem with Valeant. Once the two had their fill of Allergan shares, they planned to nudge the company into a deal to sell itself to Valeant.
Ultimately, the hostile takeover never came together, but putting Allergan in play sent its shares soaring. Pershing Square made more than $2.6 billion on its investment in just a matter of months. That's the kind of opportunity only available to investors with thick skin and billions of dollars of capital to invest.
Entering a new frontier
Last year, Pershing Square created its first "permanent" fund, listing it on a stock exchange in Amsterdam. Known as Pershing Square Holdings, it mirrors the company's hedge fund portfolios and allows everyday investors the opportunity to invest alongside Ackman. By contrast, hedge funds are typically limited to so-called "accredited" investors with million-dollar net worths or substantial annual income.
Unlike the hedge funds, the permanent fund doesn't allow investors to redeem their money. Instead, investors cash out by selling their shares to other investors. Pershing believes this will help it generate better returns, as it won't have to sell investments to meet redemption requests. (During the financial crisis, panicked investors withdrew about 27% of their investments from the company, according to the Financial Times. As for whether permanent capital will boost its returns...well, it's simply too early to tell.)
Can the winning streak continue?
Investment managers typically put up their best years when their funds are small. Warren Buffett's best performance came when he was still an unknown fund manager in Omaha. The same is also true of David Einhorn, who dropped his long-standing goal of achieving 20% annual returns for his investors in early 2015.
With as much as $20 billion in total assets under management, achieving market-beating returns may be more difficult for Pershing going forward, particularly after management fees are subtracted from its gross returns. For what it's worth, the market seems to agree. Its permanent capital fund, Pershing Square Holdings, last traded below its asset value. If it were expected to beat the market, it should trade at a premium.
Frankly, it's impossible to predict whether or not Pershing Square can continue its incredible run. But I think it's safe to say that you could do much worse than investing in a fund it manages.