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Target practice

9 Jul 2013 By Jeffrey Goldfarb

Bill Ackman’s new fund is off-Target – in a good way. Four years after the hedge fund boss ate humble pie for a bad concentrated bet on the U.S. retail chain, he is seeking $1 billion for another secret single-stock pick. Paying for the privilege to invest blind in a publicly listed company warrants skepticism. But Ackman may have learned from his mistakes.

Pershing Square Capital, Ackman’s firm, has rattled cages as an activist investor at some two dozen companies, most recently Procter & Gamble and J.C. Penney. A 2007 tilt at Target was one of a handful of blowups to dent Pershing Square’s lifetime annualized return of around 20 percent after fees.

Backers, if they stayed for the whole ride, lost about three-quarters of their money. Their losses were amplified by the structure of the holding, which added risk by using call options to acquire the Target stake, and the investment was badly timed to coincide with the recession that struck soon after Ackman turned up.

This time, there will be no leverage. Ackman’s tactics also have evolved. Rather than wait too long to present publicly his ideas for change, he will try to rally support from shareholders soon after making the investment if private negotiations with the company don’t work.

Pershing Square’s other single-minded funds, including a 2005 investment in Wendy’s and a publicly listed shell company that became a vehicle for Burger King, have done well. And investors who partake in Ackman’s latest “best idea” will get a break, too. They’ll pay only a 0.25 percentage point management fee and he’ll take anywhere from 5 percent to 15 percent of the profit. That’s less than Ackman and other hedge fund managers typically charge.

Speculation that Pershing Square’s target might be FedEx pushed that company’s shares up as much as 8 percent on Tuesday. Even reduced fees may chew up most of that kind of pop in the stock of whatever company Ackman is after. For those who believe in him, that may just be the price for getting in alongside him. But the less devoted might do as well – and get the added bonus of being able to sell when they please – by following Ackman into a simple stock investment once he reveals the target’s identity.


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