There were many excuses in Bill Ackman's annual letter to shareholders, in fact some 13 pages worth, which sought to explain how "Pershing Square funds suffered their greatest peak-to-trough decline and worst annual performance ever."
To be sure, Ackman is quick to point out that the 21% plunge in P&L in 2015 was not just due to his infamous tryst with Valeant, although that's where it started:
"the inception of the portfolio’s decline began with Valeant in August. We have discussed at length the events at Valeant which catalyzed the stock’s initial decline: political attention on drug pricing and the industry, regulatory scrutiny, attacks by short sellers, and the termination of a distribution arrangement representing ~7% of Valeant’s sales. But, we would never have expected that the cumulative effect of these events would have caused a nearly 70% decline in the stock, nor do we believe that they will permanently impair Valeant’s intrinsic value."
It quickly went downhill from there:
Contemporaneous with the decline of Valeant, the rest of our portfolio went into free fall which has continued up until the present.
Ah yes, words to warm the heart of any LP. The ongoing collapse of Perishing Square is confirmed by the followng table:
There are many more excuses and accusations, but the most notable one in our view is Bill Ackman blaming hedge fund groupthink for his deplorable performance, something he calls the "Pershing Square Correlation":
The companies in our portfolio that have suffered the largest peak-to-trough declines are Valeant, Platform, Nomad, and Fannie and Freddie. The inherent relative risk of their underlying businesses and their more leveraged capital structures partially explain their greater declines in market value as markets moved to a “risk off” mentality. But their massive declines in value, in our view substantially more than can be accounted for due to fundamental issues in their respective businesses, cannot, we believe, be attributed to these factors. Importantly, none of these companies is in any of the important market indexes. Their shareholder bases are, therefore, largely comprised of hedge funds and other active managers, which we believe has contributed to their underperformance.
The Pershing Square Correlation
Perhaps the largest correlation in our portfolio is one that we have not previously considered; that is, the fact that we own large stakes in each of these companies. We have had the benefit of a “following” of investors who track and own many of our holdings. This has given us significantly greater clout than is reflected by our percentage ownership of these companies, and we believe that it is partially what has caused the “pop” in market price when we announce a new active investment. As a result, these active managers’ performance is often closely tied with ours. When Valeant’s stock price collapsed, our performance, and that of Pershing Square followers, were dramatically affected. Nearly all of these investment managers are subject to daily, monthly, and quarterly redemptions, and therefore, many were likely forced to liquidate substantial portions of their holdings which overlap with our own.
The vulnerability of a company to an overall market decline, a short seller attack, or negative headlines is highly correlated with the nature of the investors who are the principal holders.
"While it is impossible to know for sure, we believe that our continued negative outperformance in the first few weeks of the year relates primarily to forced selling of our holdings by investors whose stakes overlap with our own."
So let's get this straight: Ackman eagerly trots out 300-slide presentations and speaks for hours to get all the hedge fund managers on his side, has people from his team attend every "idea dinner" imaginable to pitch trades he already has on his books, and is otherwise delighted when the "hedge" fund piggybackers do what he does on the way up... but on the way down it's all their fault when his ideas fizzle as they ultimately do, and the hedge fund hotel burns down?
Finally, something amusing: Ackman tries to earn some brownie points for correctly predicting the Yuan devaluation. There is just one problem...
Last summer, we built large notional short positions in the Chinese yuan through the purchase of puts and put spreads in order to protect the portfolio in the event of unanticipated weakness in the Chinese economy. We also purchased puts on the Saudi Riyal as an inexpensive way to hedge against a continued decline in energy prices. Both of these currencies are pegged to the U.S. dollar, and therefore were inexpensive to hedge against the dollar as the pegs reduced volatility and the cost of put options. Two days after we began to build our position in the Chinese yuan, China did a 2% surprise devaluation which substantially increased the cost of the options we had intended to continue purchasing. We continued to build the position thereafter by buying slightly more out of the money puts and selling further out of the money puts so as to keep the cost and risk/reward ratio of the position attractive.
... he hasn't actually made money:
To date, despite the large notional size of this currency/market hedge and continued weakness in the yuan and growing pressure on the Saudi Riyal, we have made only a modest profit on these investments.... Our currency puts, therefore, have not, to date, served to be a useful hedge against declines in our portfolio as our investments have declined much more dramatically than we would have expected in light of their limited exposure to the Chinese economy and oil prices.
All this and much more demonstrating why hedge levered-beta funds are now a dying asset class, in the full Ackman letter below.