The schadenfreude has been palpable among sections of the financial press over the past two years as publicity-loving, controversy-stoking hedge fund manager Bill Ackman’s Pershing Square Holdings (LSE: PSH) has run into trouble and notched up consecutive years of double-digit negative returns.
But with his closed-ended fund’s London-listed shares now trading at a 15% discount to their net asset value (NAV) is now the time to buy into Ackman’s well-earned reputation on the cheap?
Well, it remains to be seen whether this steep discount can be closed in the coming quarters. Ackman initiated the London listing for the £3.6bn fund with the explicit purpose of closing the valuation gap by increasing index fund holdings due to its automatic inclusion in the FTSE 250. As the fund was only listed in May, and joined the FTSE 250 in June, only time will tell whether this discount can be narrowed and today’s valuation prove a true bargain pickup.
But, there is no doubting that UK investors will now find it easier to piggyback on the future returns of a very successful investor with a long history of market-beating returns. However, they do need to remember well the fact that historic out-performance does not indicate a likelihood of future out-performance.
An added wrinkle to consider is that of the 10 long positions and one short position the fund publicly disclosed holding as of June are all North America-listed companies and so may be a bit risky for British investors. Furthermore, Ackman is famous for making highly concentrated bets. As of the end of Q1, a little more than 70% of the portfolio was tied up in just three companies: Burger King parent Restaurant Brands International; fast casual restaurant Chipotle; and snack food producer Mondelez. This means investors should expect wild swings in performance and share price due to little diversification.
A safer option?
Another famous American hedge fund manager who has tapped British investors for long-term capital is Dan Loeb of Third Point. His London-listed, closed-ended fund, Third Point Offshore Investors (LSE: TPOG), invests its capital in the Third Point master fund and also trades at around a 15% discount to its NAV. Like Ackman’s fund, this discount is down to a variety of factors such as illiquidity of shares, the relatively high management fees charged, and investors pricing in the potential for poor performance.
As the current discount is relatively in line with historic levels, I reckon the fund probably isn’t a screaming bargain. However, for investors looking for exposure to a more diversified hedge fund, Third Point could fit the bill with the top three positions as of Q1 representing just under 40% of the portfolio. The fund is also more international in nature with large stakes in Italian bank UniCredit SpA, German utility E.On and Swiss multinational Nestlé as of the end of June.