How JC Penny Damaged This Hedge Fund Manager's Reputation
Bill Ackman's Pershing Square funds have a great track record. Ackman has been considered one of the real outstanding investment geniuses - until now. It seems his decision to turn around JC Penny just backfired.
Ackman took a large position in Penny with the idea that he knew how to turn the chain around after years of declining performance. With his big position came a seat on the Board and the pull to hire Ron Johnson from Apple. Johnson successfully built the Apple retail stores. But whatever Johnson did with JCP didn't work. And so the Board decided to re-hire the CEO it fired before hiring Johnson, whom they just fired. All that was a slap in Ackman's face.
Not only that, but Ackman's funds now will be selling their Penny stock (that's with a capital "P" - as in JC Penny, not "penny stocks"...okay so it was a weak attempt at a pun). This damages Ackmans' sterling reputation. It also may drag down performance of Pershing Square.
On the other hand, like other hedge fund managers before him, Ackman may decide to put the Penny stock into what's known as a "side pocket":
We'll have to wait and see just how bad the JC Penny investment turns out to be for Ackman. But it could be bad enough to really sully his reputation.
This is one reason you ought not invest in hedge funds - even the best of them - unless you've got oodles of money. I once worked with a family of hedge funds. A couple of funds had years of great performance - until one year (the same year ironically) both made some bad decisions. Sadly, someone I knew invested a significant amount of money for their employer and immediately lost almost 30% in one month. I had warned them not to invest so much, but they ignored the warning. After all, with the track record this manager had, how badly could they screw up? At least that was the thinking on the part of the buyer. Same story with the other fund. They lost "only" 16% - again in one month. So, as it turned out, these smart hedge fund guy could screw up pretty badly.
My guess is that with the side pocket move, Ackman may be able to save his bacon. But I don't know that I'd want to invest with the guy. He really did screw up royally.
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Ackman took a large position in Penny with the idea that he knew how to turn the chain around after years of declining performance. With his big position came a seat on the Board and the pull to hire Ron Johnson from Apple. Johnson successfully built the Apple retail stores. But whatever Johnson did with JCP didn't work. And so the Board decided to re-hire the CEO it fired before hiring Johnson, whom they just fired. All that was a slap in Ackman's face.
Not only that, but Ackman's funds now will be selling their Penny stock (that's with a capital "P" - as in JC Penny, not "penny stocks"...okay so it was a weak attempt at a pun). This damages Ackmans' sterling reputation. It also may drag down performance of Pershing Square.
On the other hand, like other hedge fund managers before him, Ackman may decide to put the Penny stock into what's known as a "side pocket":
One thing Ackman will likely not do is try to put the JC Penney investments into a side pocket the way some other hedge funds have done with their own poorly performing assets.It's a trick these guys do to isolate their losers so that they can take in new investors without the drain of the big losses Penny may cause. Of course, current investors get screwed, since their money is tied up for two years before they can redeem shares. They will feel the impact of Penny losses, if there are any. But, hey, everyone can't win at the hedge fund game.
We'll have to wait and see just how bad the JC Penny investment turns out to be for Ackman. But it could be bad enough to really sully his reputation.
This is one reason you ought not invest in hedge funds - even the best of them - unless you've got oodles of money. I once worked with a family of hedge funds. A couple of funds had years of great performance - until one year (the same year ironically) both made some bad decisions. Sadly, someone I knew invested a significant amount of money for their employer and immediately lost almost 30% in one month. I had warned them not to invest so much, but they ignored the warning. After all, with the track record this manager had, how badly could they screw up? At least that was the thinking on the part of the buyer. Same story with the other fund. They lost "only" 16% - again in one month. So, as it turned out, these smart hedge fund guy could screw up pretty badly.
My guess is that with the side pocket move, Ackman may be able to save his bacon. But I don't know that I'd want to invest with the guy. He really did screw up royally.
More...
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