Pershing Square

Did Carl Icahn just take his feud with Bill Ackman to the next level? He very well might have, and the stakes have never been higher...

• Obama Signs Bill Enacting Budget Deal to Avert Most Tax Hikes (BBG)
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• Who's Afraid of Italian Elections?  (WSJ)
• China services growth adds to economic revival hopes (Reuters)
• Asian Economies Show Signs of Strength (WSJ)
• Japan’s Aso Targets Myanmar Markets Amid China Rivalry (Bloomberg)

Just hours after Ackman announced his joining Einhorn's alleged Herbalife short, we jokingly tweeted our expectation of bandwagon-following 'value' investors imminent herding...

Ackman joins Einhorn in the HLF short. Next up: Titney Wilson

— zerohedge (@zerohedge) December 19, 2012

And sure enough, with the holidays providing just enough time to read the 300 pages and to form his own "blindingly obvious" conclusion, Whitney Tilson has jumped in short HLF. We can only imagine the cost of borrow and wonder on the post-OPEX timing of a short squeeze given the huge short interest and the fact that HLF has recently hired Boies, Schiller, and Flexner to defend its business model. HLF is trading up 2% in pre-market.

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• US banks face rise in bad loans cover (FT)
• Daily Gun Slaughter in U.S. Obscured by Newtown Rampage (BBG)
• China Restricts Bond Sales by Risker Companies (BBG)

I recently received the following question from a friend of mine and wanted to share my thoughts with my market pals, and throw this out for feedback.  I would be particularly interested in hearing from my derivatives friends who are much more technically informed than I am on the subject.

“I was looking at something today that I thought you would probably have some comment on:  have you noticed how wide the out months on the VIX are versus the one or two month?  How are you interpreting this?”

From my viewpoint this has been a key debate/driver in the equity derivatives world for a good while now (I started having this discussion in early 2011 with some market pals and the situation has only grown more extreme since then).

This is what the most brand name US hedge funds bought and sold in the third quarter.

There was a time when Bill Ackman, constantly misperceived as a retail investing genius, blew up an entire fund solely dedicated to investing in Target, mostly via calls as in something out of Whitney Tilson's wettest dream (incidentally, another "investor" who could not get enough of JCP at $27), Pershing Square IV (full hilarious letter from Pershing Square Capital Punishment to the PSIV investors here). His current massive investment in JCP is luckily not a standalone fund, but it is now certainly stalked by the ghost of PSIV as JCP literally blew up overnight and any hope of the rumored "10-15 return" that Ackman predicted in the stock has now gone up in smoke. Oh well: there is always the gamble on Procter and Gamble.

Sometimes, when one desperately chases alpha at any cost, all one needs to see is a somewhat credible asset manager, in this case Bill Ackman's Pershing Square, invest a massive amount of cash in a given company, to decide to invest alongside. In this case the company is JCPenney, and the amount in question invested by Ackman being $1.3 billion (at last check his third biggest positions after GGP and CP). Usually this strategy, elsewhere known as herding, 13F chasing, or alphacloning, works, until it doesn't. In the case of JCPenney it just didn't, after the company just blew up in real time dropping a tape bomb, missing on the top and the bottom, cutting the forecast, and for good measure also eliminating the dividend. End result: Ackman just lost nearly $200 million after the stock imploded by nearly 15% after hours, and all those who blindly piggybacked along without doing their homework (such as Whtiney Tilson whose 4th largest cash position is JCP), went for the ride.

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• Portugal Town Halls Face Default Amid $12 Billion Debt (Bloomberg)
• Hidden Fund Fees Means U.K. Investors Pay Double US Rates (Bloomberg)
• Europe Weighs Trade Probes Amid Beijing Threats (WSJ)
• Bank of Japan Stimulus Row Fueled by Kono’s Nomination (Bloomberg)

We already know 2011 was horrible for hedge funds, for Wall Street bonuses, and soon, for luxury retailers. So before we write off 2011 for good, here is the penultimate HSBC report (#52) showing HF performance through mid-December. Some notable mid month numbers: Moore -0.05%; Caxton:  -0.09%; Clive: -1.22%; York: -1.20%; Third Point: -1.80%; Pershing Square: -0.70%; Perry: -2.94%; Owl Creek: -1.70%; Highbridge: -2.11%; Landsdowne: -0.89%; Viking: -0.57%; Maverick: -3.08%; Kingdon: -0.77%; Marshall Wace: -0.23%; Odey: -5.34%; Canyon: -0.30%; As for Paulson... oh well.

The focus of the recently released quarterly investor letter by Bill Ackman's Pershing Square seeks not so much to explain why the fund has a negative return YTD, but to justify why the Fund's approach to "intrinsic value" is right, and the market, well, not so much, as well as the show why even if he continues to be wrong he won't have to dump losers. Supposedly this is the kind of the thing that LPs like hearing these days. The one line that sticks out like a sort thumb in this valiant effort to explain the lack of alpha is the following: "It is largely a function of Pershing Square’s growing influence in the capital markets, our experience with previous investments, and specific circumstances with each of our holdings." That's great, and a false belief in one's market moving "economy of scale" works great, until it doesn't. Just ask Bill Milller. Also we wonder: where have all those "HF hotel" idea dinners that used to generate so much faux alpha for the Ackman-Einhorn-Loeb trio, gone? In fact, the hubris of mistaking beta participation for alpha creation is often the ast mistake many hedge funds make just before they can't make any more mistakes. That aside, in the letter Ackman explains away his thesis (again) on JCP, Fortune Brands, Family Dollar, GGP (no longer the sterling poster child of the REIT renaissance), Citi and lastly his recent(ly leaked) investment in the Canadian Pacific Railway. All we can say is that we hope Ackman is better hedged for the coming retail downturn than he was back in 2008.

With the near record October hope rally a distant memory now, the hope that hedge funds participated in it is also just that. Alas, while most hedge funds exhibited a more than 1x beta on the way down in August and September, most were lucky to get half the upside on the way up in October at best. While there are some outlier surprises, unfortunately it is the ones with an abysmal Sharpe Ratio, so for investors who enjoy huge drawdowns and massive month-to-month vol, they probably lucked out in October. Everyone else: better luck next time. Some very notable let downs: Brevan Howard: -1.25%, Tudor: -2.44%, Moore Global: -2.23%, Landsdowne: -0.50%, Bluecrest: 0.43%, Perry: 3.39%, King Street: -0.04%, Blue Mountain: 0.73%, Fortress Macro: -2.19% and last and probably least JAT Capital: -13.7%.

Since our subscription to the HSBC HF tracker appears to have expired, we now rely on Bloomberg Brief's for hedge fund performance update. And what an ugly update it is, especially for members of the old groupthink guard, led by Pershing Square's Bill Ackman. To wit: "William Ackman’s Pershing Square Capital Management LP dropped by 6.7 percent in the first half of August to drop year-to-date returns to -10.57 percent, according to HSBC Private Bank data." And while we know of the scorched earth currently happening on the 50th floor of 1251 Avenue of the Americas, another big time hedge fund, Owl Creek, is getting pummeled behind the scenes: "Owl Creek Asset Management LP’s $4.8 billion offshore fund was down 9.3 percent in the first 12 days of August, according to HSBC Private Bank data. The fund, managed by Jeffrey Altman, is down 9.16 percent year-to-date through Aug. 12."

Hedge fund numbers though just before the last week of June when everything ripped. Looking at these it is not difficult to see why stocks were in dire need of a vapor volume ramp: Millennium: +0.16; Tewksbury: -0.40%; Cantillon: -3.99%; Silverpoint: -0.20%; Davidson Kempner: -0.56%; King Street: -1.07%; Owl Creek: -4.8%; Perry: -3.72%; Pershing Square: -3.7%; York Capital: -3.47%, Avenue: -1.9%; Bluemountain: -0.67%; SABA (aka negative basis implosion-in-waiting): 0.46%; Viking Global: -1.09%; Maverick: -4.25%; Highbridge Long/Short: -6.37% (oops), REIF B: -0.75%; Cobalt: -0.88%; Tudor: -2.83%; Moore Global: -2.35%; Moore Macro: -0.64%; Hutchin Hill: -0.30%; and so on.

Bruce Berkowitz, recently notorious for taking the other side of David Einhorn's St Joe short position, but also with long positions in such governmental recovery cases of bankrupt basket case firms such as AIG and MBIA, released his thank you letter, after generating a 25.5% return. His two top receipients of gratitude: the government and Goldman Sachs. Pretty much explains everything about whom to thank when you want to outperform the market. It should also explain which particular centrally planned regime and fixed income monopoly one must never raise their voice against, if one doesn't want to be 'GM senior bondholdered.'