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Investors Pull $600M After Ackman’s Bad Bets

July 19, 2016, 10:50 PM UTC

Updated: 2:00 p.m., July 20

On Wednesday, Bill Ackman hosted a quarterly conference call for his investors, his first since serving a full quarter on Valeant’s board and following the recent Herbalife settlement with the Federal Trade Commission.

In the past, investors and reporters have hung on every word, searching for nuggets of potential market-moving wisdom from the brash Ackman. Instead, Ackman this time around had to address tough questions about his losing bets on Valeant and Herbalife, as well as the dismal overall performance of Pershing Square’s funds.

Ackman’s portfolios have suffered through their worst performance patch in his career which, not surprisingly, is causing some investors to flee.

In the first six months of the year, investors yanked roughly $600 million out of Ackman’s funds, Fortune has learned. The money, including $360 million in the second quarter alone, equals roughly 5% of the just over $12 billion Ackman’s Pershing Square manages, and about 30% of the money that could have left the fund since the beginning of the year under Ackman’s strict withdrawal rules. (Ackman’s previous firm closed after it was hit with a wave of withdrawals following poor performance in 2002.)

On the investor call Wednesday, in a reference to this Fortune story, Ackman said that this year’s redemptions, as a percentage of capital, were the sixth lowest in terms of the amount of redemptions over the past eight years. Indeed, this year’s redemptions were 37% lower than the average of the last eight years.

“We benefit from a stable capital base,” he said. “Our investors have been incredibly supportive of us.”

Ackman’s most notable losing bet has been on troubled drugmaker Valeant Pharmaceuticals (VRX), which has seen its shares plunge 90% in the past year. Another loser has been Herbalife (HLF), which Ackman very publicly bet against, defiantly predicting regulators would either shut it down or it would collapse under restrictions they impose on it. Either way, he has predicted the stock would “go to zero.”

(For the full story on Ackman and Herbalife, read Fortune’s feature story The Siege of Herbalife)

Instead, the company’s shares have gained 20% this year. On Friday, Herbalife settled an investigation with the FTC, which fined Herbalife $200 million and is forcing it to restructure some of the way it does business, but stopped short of calling the company a pyramid scheme. Herbalife’s shares rose 10% on the news, putting Ackman’s beleaguered bet an estimated $100 million further in the red.

All told, Ackman’s hedge funds have fallen roughly 40% since last August, the worst run of returns in Pershing Square’s 12-year history, and far worse than what the overall market has done in the same time. The S&P 500, for instance, is up 4%, including dividends, since last August.

Ackman has been losing his investors’ money hand over fist during the past year—the 40% decline equates to more than $7 billion in paper losses for Pershing Square investors.

Earlier this year, as many as eight out of 11 stocks in his portfolio were down for 2016. Some of those stocks have rebounded, and just four stocks are currently underwater for the year, but that hasn’t turned around the overall performance of the fund, which is still down 16% in 2016. (Ackman’s publicly traded investment vehicle, which uses leverage, was down 19% through July 12.) The S&P 500, meanwhile, is up 6% year-to-date as of Tuesday’s close.

The big surprise might be that redemptions aren’t larger for the 50-year-old billionaire. Given how bad his investments have done, observers might expect that more of Ackman’s investors would be running for the doors. One reason may have to do with the way Pershing Square’s “gates” its funds, requiring many of its investors to take their capital out over a two-year period, in quarterly increments, which means at most investors can only pull only 12.5% of their money a quarter. Other investors can pull their money out more quickly.

(For more on Ackman and Valeant, read Fortune’s feature story Bill Ackman and Michael Pearson: The Inside Story)

In addition, almost half of the fund is permanent capital, much of it raised by selling shares to investors when Ackman listed a public fund Pershing Square Holdings in Amsterdam in 2014. Unlike typical fund investors, when those investors want out, Ackman doesn’t have to give them their money back. They simply sell their stock, which is exactly what they’ve done. Pershing Square Holdings, which went public at $25, has been trading a little under $15, a 40% decline in line with the losses in the portfolio since last year.

But all indications are that most of Ackman’s investors plan to stick with him. The reason? Even with the current downdraft in performance, Ackman’s long-term track record—at around 15% annualized since 2004—is still one of the best in the business and more than double the S&P 500, including dividends. On top of that, Ackman tends to provide more transparency than other hedge fund managers, and he’s generally recognized as a good salesman.

Indeed, at the end of last year as Pershing Square fell 20%—at the time was the fund’s worst-ever year—redemptions were lower than normal in large part because investors were reluctant to ditch Ackman, and sell at such rock-bottom prices. The same thing happened during the first quarter.

“We have not lost faith in Bill Ackman,” said Bryan Schneider, managing director at EnTrust Capital, a fund of funds that has trimmed its Pershing Square position during the second quarter. Schneider said the firm has no plans to redeem any more from Pershing Square. Other activist hedge funds have seen larger redemptions as a percentage of assets.

At the same time, Ackman has been able to attract new money, wooing new investors by arguing that when he’s down is the best time to buy, given his ability to snap back in the past. His bang-up 40% 2014 followed a lackluster showing in 2013, when he lost a lot of money in both J.C. Penney (JCP) and Herbalife.

About $150 million in new money has been raised this year. Factor that in, and Pershing has only seen a net outflow of $450 million in investor assets.

Still, the fund, which had grown to around $20 billion in assets under management a little over a year ago, is a lot smaller than it used to be.

A number of Pershing’s clients admit, confidentially, their patience has been wearing thin. One thing that has raised red flags for some is Pershing Square’s risk management, given its Valeant stake that was at one time more than 20% of the firm’s capital. Some investors also say they have concerns about Ackman’s judgment on Valeant, especially his decision to add to his position last November, after the company’s questionable relationship with now-shuttered specialty pharmacy Philidor was exposed, sending the stock tumbling. Even Ackman admitted at a recent Senate hearing on Valeant’s drug pricing that there was a “failure in due diligence” on his part regarding Valeant.

Ackman declined to comment for this story.

Update: Story has been updated to include comments Ackman’s made about redemptions on a call with investors.