RPT-Valeant slump poses big threat to small hedge funds

Fri Oct 23, 2015 7:00am EDT
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By Svea Herbst-Bayliss and Lawrence Delevingne

BOSTON/NEW YORK Oct 22 (Reuters) - Valeant Pharmaceuticals' market slide has hurt the returns of several large U.S. hedge funds, but for smaller players with outsized bets on the drug company the fallout could be far more painful, according to industry watchers.

Among smaller hedge funds invested in Valeant, at least three had more than 20 percent of their assets tied up in the stock as of June 30, according to data from Symmetric.IO, a research firm that provided the data to Reuters on Thursday. They include Tiger Ratan Capital Management, Marble Arch Investments, and Brave Warrior Advisors, according to the numbers, which are based on publicly reported stock positions and may not include hedges.

It is not known whether the funds have maintained their holdings into this week, but if they did, they could be looking at losses worth hundreds of millions of dollars.

"The major risk is with funds that have an unstable, short- term oriented capital base, where a poor few months of performance can lead to significant capital flight," said Jonathan Liggett, Managing Member at JL Squared Group, an investment advisor. Smaller hedge funds can quickly collapse if investors demand their money back all at once, forcing managers to exit profitable positions to raise cash quickly.

Valeant shares are down 35 percent this week after a short-seller's report accused the company of improperly inflating revenues, igniting fears about federal prosecutors' probes into its pricing and distribution.

Valeant has denied the allegations and its Chief Executive Michael Pearson and other board members are due to address them in more detail in a call with investors on Monday.

The slump has trimmed billions of dollars off the ledgers of investors such as hedge fund mogul William Ackman's Pershing Square Capital Management, activist hedge fund ValueAct Capital, and investment firm Ruane, Cunniff & Goldfarb.   Continued...