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The Fed’s Hawkishness Dents Pershing Square’s Turnaround

Bill Ackman makes small August gains as the stock market comeback fizzles.

Until recently, Bill Ackman had been browbeating the Federal Reserve to raise interest rates aggressively. But the Fed’s recent signals that it plans to keep doing so isn’t helping the stock market as the hedge fund manager hoped. Nor is it helping Ackman’s Pershing Square Capital hedge funds.

The Fed’s hawkishness turned a mid-summer market rally into another leg down in late August, stopping this year’s turnaround of Pershing Square Holdings in its tracks. The publicly-traded hedge fund ended August only up 2.9 percent, compared with a gain of 9.4 percent as of August 16. That leaves its year-to-date decline at 16.1 percent. The S&P 500 is now down about 17 percent for the year.

Pershing Square’s worst performer of the month was also its biggest holding: Universal Music Group, which fell 13 percent during August and is down 22 percent for the year. By mid-August, it was also the firm’s worst-performer of the year, accounting for 4.9 percentage points of the fund’s losses on a gross basis.

Universal is now trading around 19 euros (or $19) per share, slightly above the 18.58 euros Ackman’s Pershing Square paid for a 10 percent stake in the company when French conglomerate Vivendi spun off 60 percent of it last September in an initial public offering.

Ackman, who is now a member of Universal’s board, originally planned to use his special purpose acquisition company, Pershing Square Tontine Holdings, to make the Universal investment. He nixed the plan after the Securities and Exchange Commission said it would not meet the requirements for a SPAC.

Since then, the momentum surrounding Ackman’s once-heralded SPAC, which at $4 billion was the largest ever created, has been all downhill. As the SPAC market cooled, and the SEC cracked down on SPACs, Ackman never found another suitable merger partner for Tontine. In July he announced he would liquidate it and return capital to investors. The liquidation also represented a small loss for Pershing Square, which paid $65 million for stock and sponsor warrants. According to the firm’s semi-annual report to investors, it would get $14.5 million of this back during the liquidation. 

Pershing Square also sold out of two holdings during the quarter.  The firm sold its entire stake in Netflix during the second quarter, after owning it for a few months. While that sale created a stir — and a big loss for Pershing Square — the hedge fund also sold out of Domino’s Pizza, which it has bought in 2021.

Ackman earlier said he bought the stock for around $330 per share, and by the end of July it was trading around $389. Ackman said the stock price and valuation had risen to more than 28 times the firm’s estimate of the next twelve months’ earnings. 

“In light of the company’s relatively high valuation in the context of a volatile market environment, we decided to exit our investment to raise cash for alternative investment opportunities,” he said in the report.

Ackman’s only winning stock in August was Lowe’s, which rose a little more than 1 percent during the month, though it is down about 25 percent for the year. Lowe’s accounted for 26 percent of the firm’s portfolio of U.S.-listed stocks, according to Pershing Square’s 13F filing. (That filing does not include Amsterdam-listed Universal nor holdings in Fannie Mae and Freddie Mac, which Pershing Square originally purchased in 2013.) 

Pershing Square reported that its interest rate hedge was its biggest winner for the year as of mid- August, accounting for almost 10 percentage points in gross gains.

Most of Pershing Square’s hedge fund assets are now in the publicly traded vehicle, whose non-U.S. listing has created a gaping — and growing — discount to net asset value, despite Ackman’s many efforts to narrow it. That discount now stands at what Ackman himself called an “extraordinary” 35 percent.

Ackman and other executives now own 25.5 percent of Pershing Square Holdings, which has also repurchased 22.5 percent of its shares since the IPO, at an average discount of 27.1 percent.

“We have a demand problem compounded by certain marketing limitations,” he wrote in a letter to investors accompanying the mid-year report. 

“While [Pershing Square Holdings] is managed by a U.S. manager and principally owns North American headquartered companies, it trades only on European exchanges, the [London Stock Exchange] and Euronext Amsterdam,” he wrote. “There are significant regulatory limitations in our ability to market [Pershing Square Holdings] in various jurisdictions, including the U.S, a more logical market for a North American-centric fund run by a U.S. manager.”

As a result, one thing on Ackman’s mind these days is how to become a U.S.-listed company. “One can envision a world in which over time [Pershing Square Holdings] becomes a controlling owner of one or more businesses that comprise the substantial majority of our assets and income,” he explained. 

“In the future it may be able to operate not as an investment company in the U.S., but rather as an operating company that could be listed in the U.S.”

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