A biking incident took place in 2012 which reached epic proportions in the hedge-fund eco-system and was detailed in Vanity Fair the following year.
Hedge fund manager William (Bill) Ackman joined a bunch of cyclists, including hedge fund manager Dan Loeb, on a 26-mile bike ride one way. Being the ever competitive alpha male, Ackman bolted ahead early in the journey only to pathetically lag way behind the others. In the end, he could barely pedal and was screaming from the cramps in his legs.
One participant noted, "I've never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals... His mind wrote a check that his body couldn't cash."
A year after the incident, Street Authority likened Ackman’s investing strategy to that of riding a bicycle: “Some activist investors like to start with a small position or take a "backseat" role, but Ackman starts out in high gear: He takes on management directly and generally looks for a board seat immediately. Ackman does all his research upfront -- before taking a stake, and he has a goal in mind before even approaching management.”
His public squabble with the management at J C Penny comes to mind, before he eventually sold his entire stake in the company in 2013. What does get top-of-the-mind recall is his famed bet against Herbalife which he once said he would pursue to "the end of the earth" since it is a "criminal enterprise" and "a pyramid scheme".
Ackman's hedge fund firm Pershing Square Capital Management took a short position in nutritional supplement company Herbalife on May 1, 2012. He went public with his position only in December 2012 and stated that his position was worth $1 billion. The stock price went on to soar as high as $83.51—the opposite of what Ackman was hoping for, making it seem like his worst bet ever.
In an interview with CNBC this year, he claimed to have spent "something less than $50 million" on his campaign against Herbalife, predominantly in legal fees, and research and investigative costs. Around two months ago he was quoted in Vanity Fair as saying that the break-even point on his bet will be reached when Herbalife falls to the “low 30s” per share (right now it trades around $42). To make a substantial profit, it would have to slide every further, which he is quite sure it will. In fact, he is certain it will eventually touch zero when the company shuts down.
Besides this famous short, according to Value Walk, another short bet appears to be on a company with a market cap over $5 billion.
Nothing surprising here. In the period during 2007-08, he also took short positions in Ambac Financial Group and mortgage insurer MBIA, making truckloads of money. He challenged MBIA's triple-A rating, alleging that the company was guaranteeing untested asset-backed securities. He began shorting MBIA at around $60 and rode the stock all the way down to $8 before closing out his short.
During the same period, his fund initiated short positions in Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) through credit swaps. According to Pershing’s 2Q2012 note, “we made multiples of our CDS investment on Freddie Mac and incurred only a modest loss on Fannie Mae CDS.”
Incidentally, he is bullish on them now. When their misfortunes were catastrophic in 2008, it provided fertile ground for speculation. Now their complete turnaround has them raking in billions by way of profits.
Next: Bill Ackman's investing style
