The Morning Brief: Bill Ackman’s Pershing Square Adopts a Hurdle Rate

Bill Ackman’s Pershing Square Capital Management is offering a new share class that would include a hurdle rate before collecting a larger incentive fee than investors are currently being charged. According to Reuters, new and existing investors would be able to invest in this class, which would only begin charging a performance fee once the fund is up at least 5 percent, and then charge 30 percent of the gains above that level.

The embattled New York activist hedge fund firm, which charges a 20 percent incentive fee, created this option in response to requests from existing investors, including a large pension fund, according to the wire service, which broke the story.

“The fee arrangement was designed to accommodate certain investors that expressed interest in retaining a greater share of returns in low to moderate return scenarios in return for rewarding us with a greater share of returns in higher return scenarios,” Pershing Square wrote in a letter obtained by Reuters.

Pershing Square has been among the worst-performing hedge funds over the past two years. Pershing Square Holdings is down 21.2 percent this year through October 25 after losing 20.5 percent last year. Pershing Square International is down 17.4 percent this year through October 11 after losing 16.6 percent last year, according to Reuters.

A recent survey conducted by the Alternative Investment Management Association found that one-third of 120 hedge fund firms managing a total of $500 billion reported including a hurdle rate in their fee formula. It also said 79 percent of the hedge funds have not changed their hurdle rate in the past five years, 16 percent said they raised the hurdle, and 5 percent have lowered it.


Shares of hedge fund activist favorite Baker Hughes jumped nearly 8 percent on Friday on reports that GE is discussing a possible acquisition of the oil services giant. The stock had been a major holding of San Francisco-based ValueAct Capital Management, which owns 7 percent of the shares even after recently selling 9 million shares.

In a note to clients, Deutsche Bank stresses that the industry needs consolidation. “With very little overlap between GE’s oil & gas operations and BHI, we would anticipate a much easier path to regulatory approval should the deal materialize,” it adds.


Jason Karp’s Tourbillon Capital Partners disclosed that as of October 27, it owned 3.3 million shares of Sarepta Therapeutics, or 6.2 percent of the total outstanding. At the end of the second quarter, it did not own any shares of the medical research and drug development company. The stock was up 119 percent in September alone after reports that the Food and Drug Administration approved the company’s drug to treat Duchenne muscular dystrophy, the first drug to treat the disease. However, it has dropped by one-third this month alone, which probably enticed Tourbillon to load up on the stock.

We recently reported the stock has helped to propel the earlier success and this year’s turnaround of the Perceptive Life Sciences Fund, managed by Joseph Edelman’s Perceptive Advisors, Sarepta’s largest shareholder. Steven Cohen’s family office, Point72 Asset Management, was the fourth-largest shareholder at the end of June.


Several investment banks cut their price targets on after the e-commerce giant reported earnings that came in below expectations. For example, Credit Suisse reduced its target from $1050 to $1000 but retained its outperform rating on the stock. Deutsche Bank cut its target from $985 to $920.

“It certainly feels we are headed for a few more quarters of lower retail profitability, consistent with previous eras,” the bank states in a note to clients. “Shares tend to underperform over the near-term, but each of these phases has presented a great buying opportunity for long-term investors.” At the end of the second quarter, Amazon was the second-most-popular stock among hedge funds, with at least 160 holders. They include at least 20 hedge funds with roots in Julian Robertson Jr.’s Tiger Management, according to


Several banks also raised their price targets on the two classes of Alphabet after the parent of search giant Google reported quarterly earnings that beat Wall Street forecasts. Credit Suisse lifted its target on the “A” shares from $1070 to $1120 and raised its estimates for the company, writing in a note to clients, “we focus on the absolute growth of profit dollars as opposed to margin percent.” Deutsche Bank raised its target on the “C” shares from $1050 to $1080, telling clients in a note that Google may be the only mega-cap company that generates nearly $100 billion in gross revenue, is still growing over 20 percent, and yet trades at just 24 times its GAAP (generally accepted accounting principles) earnings, which it suggests is low for this growth rate.

“Shares have lagged other large cap technology peers YTD and given the valuation, we think we could see outperformance into 2017,” it adds. Both share classes are among the top-ten most popular hedge funds stocks.