The Morning Brief: Ackman Takes His Lumps in JC Penney, Herbalife; Hedge Funds Mull Groupon’s (Bad) Deal of the Day

Not a good day for William Ackman’s Pershing Square Capital Management. Shares of JC Penney fell nearly 17 percent Thursday, to $17.57, after the struggling retailer reported its fourth straight quarterly loss. JC Penney posted an astounding 31.7 percent drop in same-store sales for the quarter. The fall, worse than analysts’ expectations, followed drops of 26.1 percent in the third quarter, 21.7 percent in the second quarter and 19 percent in the first. The poor results forced CEO Ron Johnson to forgo key proposals to rejuvenate the retailer. UBS cut its share price target to $10, from $13. Ackman's firm owns 18.1 percent of outstanding shares.

Shares of Herbalife, Ackman’s high profile short, surged 7.51 percent to close at $40.25 on news that the company will add two directors chosen by Carl Icahn. Under the terms Icahn negotiated with the board, the investor, who owns 13.6 percent of outstanding shares, can boost his stake in Herbalife up to 25 percent. Before the announcement, the stock had already risen 3.6 percent. Herbalife shares are up 22 percent in 2013.
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One Groupon deal certain hedge fund managers wish they didn’t buy. Two high profile Tiger Cubs, Tiger Global Management and Coatue Management, were among investors who got burned by the latest share price drop, following disappointing earnings results on Thursday. Shares of the daily deals provider tumbled by 24.28 percent, to close at $4.53. After the market closed on Thursday, Groupon announced that founder Andrew Mason will no longer be the CEO. Executive Chairman Eric Lefkofsky and Vice Chairman Ted Leonsis have been appointed to the newly created Office of the Chief Executive, effective immediately, while the company searches for a new, permanent CEO.
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Tiger Global, whose hedge funds are led by Chase Coleman and Feroz Dewan, raised its stake in the coupon purveyor from just 1.3 million shares at the end of the third quarter to 65 million shares by year-end, making the hedge fund firm Groupon’s second largest shareholder. Oops. Groupon was also Tiger Global’s second largest holding as of December 31. Double oops. Meanwhile Pierre Laffont’s Coatue Management took an initial stake of more than 7.4 million shares in the fourth quarter. On Thursday, Barclays maintained its Underweight rating and $4 price target. Credit Suisse Securities is more optimistic, with a Neutral rating and a $6.50 price target.
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Paul Tudor Jones II’s Tudor Investment plans to launch an equity hedge fund. This will be the macro firm’s first equity fund since James Pallotta left the firm in 2009. According to Bloomberg News, the firm is considering the introduction of two equity funds in 2014. Pallotta ran Tudor’s Raptor fund from 1993 through 2009, when he spun his equity operation from Tudor. Pallotta then shuttered his fund several months later.
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Daniel Zwirn is plotting a comeback. The founder of D.B. Zwirn — which shut down in 2009 following an accounting scandal — reportedly hired two executives to help build a new business. From 2002 to 2009, D.B. Zwirn managed five hedge funds, including the offshore D.B. Zwirn Special Opportunities Fund Ltd. and the domestic D.B. Zwirn Special Opportunities Fund LP. By 2006, D.B. Zwirn was managing more than $5 billion. Zwirn shuttered his firm in 2008 amid a Securities and Exchange Commission investigation into how his hedge funds valued illiquid assets. In 2011 Zwirn was absolved of any wrongdoing. At that time, the Securities and Exchange Commission filed a civil injunctive action against Perry Gruss, the former CFO of D.B. Zwirn, alleging he participated in fraud in connection with the improper transfer of client cash.
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More bad news on the hedge funds of funds front. A recent report from U.K. industry tracker Preqin found that the industry continues to shrink amid mediocre performance. Total assets under management of fund of hedge funds have plummeted from a peak of $1.2 trillion in 2008 to $810 billion in February 2013. In 2012, the average hedge fund of funds posted a 4.63 percent gain, compared with 6 percent to 8 percent gains, on average, for individual hedge funds, depending upon which database you consult. Annualized returns of funds of hedge funds over the last three years stood at 1.79 percent; over the past five years the group posted an annualized loss of 0.25 percent. Preqin also found that 35 percent of investors it interviewed are considering or planning to reduce their exposure to funds of hedge funds, and 54 percent cited performance concerns for their decision.
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Starboard Value, headed by Jeffrey Smith, urged office products and furniture company Office Depot to sell its 50 percent joint venture interest in Office Depot de Mexico before Office Depot completes its recently announced merger with OfficeMax. Starboard, which owns about 14.8 percent of shares, said in a regulatory filing that a sale of the joint venture would give the company “a significantly stronger balance sheet.” He adds that in the event the proposed merger is not completed, Office Depot shareholders would benefit from the sale because the standalone company would be financially stronger. “We recognize that OfficeMax is potentially conflicted as a sale of the JV Interest, while beneficial to the combined company, would also be beneficial to Office Depot as a standalone business and, therefore, may strengthen a competitor should the merger not be completed,” Starboard said in the filing. “If OfficeMax does not consent to Office Depot’s negotiations with Gigante or any other potential buyer regarding the sale of the JV Interest, we would view this as both unreasonable and potentially anti-competitive.”