Three years ago, Bill Ackman ran the best performing large hedge fund in the world. It’s been downhill, to the bottom, from there.
On Monday, Ackman threw in the towel on Valeant Pharmaceuticals (VRX) , finally acknowledging what many had known for a while—that he had made a huge investment mistake, one of the biggest disasters in hedge fund history, costing his investors more than $3 billion. In betting big on Valeant, Ackman has trashed his performance and reputation. What’s more, his exit from Valeant, deep, deep in the red, will make it even harder for what was once one of the hottest firms in the hedge fund business to ever make it back on top.
In a press release, Ackman’s firm Pershing Square Capital Management, said that it had sold its entire investment in Valeant, the troubled drug company that has been accused of price gouging and accounting fraud and become a poster child for everything that is wrong in the pharmaceutical business these days. Shares of Valeant have plunged 95% from their August 2015 peak.
At one point, in mid-2015, Ackman’s stake in Valeant was worth as much as $5.1 billion. That was shortly before Valeant began to unravel, originally due to a growing chorus of politicians pointing out that the firm had significantly hiked the price of a number of drugs it had acquired. Later, a short-seller publicized a bizarre relationship that Valeant had with speciality drug distribution company, one that raised the prospect of accounting fraud.
The fact that Ackman rushed to Valeant’s defense at the time only makes the dent in his reputation harder to repair. Ackman once called Valeant his No. 1 investment pick, and said that Valeant would become the next Berkshire Hathaway, comparing it to Warren Buffett’s investment and insurance colossus holding company. In October 2015, as Valeant’s troubles blew up, Ackman held a more than 3-hour conference call with investors, taking questions, defending the company, and proclaiming he would stick with the investment. At the time, Ackman said Valeant’s shares would rebound, predicting they would hit $306. Instead, Valeant’s shares now stand at just over $12. And Ackman is getting out.
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Ackman’s remaining Valeant stake, depending on when he sold the shares, was likely worth less than $300 million. Pershing Square had $11 billion in total assets at the end of February, as of its latest disclosures.
In March 2016, Ackman and an associate, Stephen Fraidin, joined the Valeant board. In the press release on Monday, Pershing took credit for a number of moves the company has made since then, including pushing out long-time CEO Michael Pearson and paying down debt. The release implied that Ackman had helped to turn around the company. In fact, Valeant’s shares have fallen more than 50% since Ackman joined the board.
Pershing Square said it was getting out of the investment because it now represented a small percentage of the fund assets, while sucking up a disproportionate amount of the fund’s time and effort. In the release, the hedge fund said it was electing to take its large tax loss and move on, leaving Ackman to devote time to other investments.
But the question is how much time Ackman has left. He started his career at a time when hedge funds were known and prized for taking big bets, even at the risk of suffering big losses. But a growing portion of the money flowing into hedge funds is coming from pension funds, run by investors who are more interested in consistent returns than outsized ones.
To that end, Ackman looks like an investor from another era, and an increasingly outdated one. His highly concentrated, and highly risky, portfolio is likely not one that most pension fund allocators will likely want to bet on in the future. Ackman’s returns, after two years of dismal numbers, have improved somewhat recently. But that doesn’t really matter anymore. Even if he is able to hit a home run or two, Ackman’s Valeant misadventure has shown he is not able to manage the downside of mistakes when they happen.
It may not just be time for Ackman to move on from Valeant, but to move on completely.
