A huge discount you may get

He is considered as a genius in investment, a self-made billionaire hedge fund manager. With his enormous success, his ego has run really high and sometimes he could become really stubborned for what he is doing. As a result, he lost a fortune in the past few years in Valeant and JCP, two trouble stocks that he bet heavily but held for too long and costed him billions of dollars in loss. Then he also took a huge haircut in shorting Herbalife, in betting against another billionaire legendary investor, Carl Icahn. He called the nutritional supplements company a pyramid scheme that he thought would eventually go to zero. Eventually his billion dollar bet lost a bundle in the 5 years saga.

I’m talking about Bill Ackman. Although he has greatly stumbled recently, Ackman is still a genius based on what he has accomplished during this entire investment life (about 3 decades). No one can win for all the bets; even Buffett cannot for sure. So even Ackman has lost a lot in the past few years, the overall performance for his fund in the long run is still very impressive. And now you may join his hedge fund with a huge discount. As you know, only a very small amount of very rich people can really afford to have successful hedge fund managers to manage their money and the cost is huge, typically in a fashion of “2/20”. In other words, one has to pay a 2% annual fee based on the asset value under management, which is mandatory regardless of performance for the year or even it is losing money for the year. Then one has to pay 20% of the profit for that year if there is any gain for the year. So it is a pretty heavy cost burden to join a hedge fund by all means. But from time to time there is a backdoor way opened to indirectly let a hedge fund manager invest for you, without such expenses at all! This is to buy the listed stock for that hedge fund when applicable. The idea is to catch the potential gains along with the success of the fund if well managed by the manager. I think we may have such an opportunity for joining Ackman’s hedge fund with a huge discount at the moment.    

If you are not aware yet, Bill Ackman is managing a closed end fund (CEF), called Pershing Square Holdings (PSHZF). As a CEF, it can traded at premium or discount and you only want to buy when it is at discount in general. Right now, PSHZF is showing a 30% discount to its intrinsic net asset value (NAV). In other words, if the fund is liquidated today, you can immediately get a 30% gain in theory. The crazy thing is that the fund’s NAV shot up 45% so far this year, comfortably doubling the S&P gain (about 20% for the year to date). Per Ackman, this is an “anomaly” due to the reason that the fund invests primarily in US stocks but the fund is listed in Europe. As such institution investors as well as a large number of retail investors in the US are not investing in this fund at all. Per Ackman, the fund now owns one of the highest quality collections of businesses. I think another reason is that people are still in doubt if Ackman may be able to recover from his huge losses in the recent past and therefore are quite hesitant to put money in his fund. Personally I’m not so much worried about Ackman as a whole as he is still doing fine as a fund manager based on the totality of his performance for the long run. I think the huge discount for the fund will likely narrow down towards it NAV and if so, it will be the easy gain for investors. Of course, for any investment, you always have to be mindful of the potential loss and have your own risk management in place, e.g. a stop loss or something. But the large 30% discount is already a built-in buffer for any downside risk for Ackman’s fund in my opinion. After all, you rarely have the opportunity to ask any hedge manager with a long term track record to manage your money cheaply!  And in this case, virtually nothing in terms of cost!