BOSTON (Reuters) - Hedge fund manager William Ackman’s strong returns have made him into one of Wall Street’s biggest managers, but even he may struggle to raise $1 billion in the next week for a single stock fund whose target he won’t identify, say investors.
One of his clients, the Public Employees Retirement Association of New Mexico, which first invested with Ackman’s Pershing Square Capital Management in 2010, has already said it will take a pass on the new special investment vehicle, unwilling to hand over so much cash for such a long time.
“We were notified of the PS (Pershing Square) special vehicle, but will not be investing as it has a longer lock-up than what we’d like,” said Jason Goeller, who oversees hedge fund investments at the $13 billion pension fund.
Ackman, an activist investor whose taste for shaking up staid corporations has earned clients an average 16 percent a year over his firm’s eight-year lifetime, set the $2.25 trillion hedge fund industry buzzing this week with his latest offer: a new special investment vehicle with a three-year lockup until September 30, 2016.
In a letter, seen by Reuters, he says it will pay off “if we are successful in effectuating change.” He will not name the company for fear of having someone else step in front of him and he has put an usually aggressive timeframe - 10 days - on raising the $1 billion needed at a time investors are taking more not less time to finalize investment choices.
A spokeswoman for Pershing Square declined to comment.
Calling the offer “a big ask” and comparing it to writing Ackman a “blank check”, a handful of industry investors speculated that many potential clients will say no just as New Mexico is doing.
“This is going to be a much tougher slog than when he raised money for the fund that invested in Target,” said a person who allocates money to hedge funds but did not want to be identified as he mulls his own allocations. He was referring to one of Ackman’s previous special-purpose vehicles that invested with retailer Target and had to be shut down after 90 percent of the money was lost.
While losses in the Target-only fund were accelerated by the use of options to leverage the bet, Ackman is doing it differently now. “We do not intend to use a material amount of financial or option leverage, if any,” he said adding that if the uses options to acquire the stock of the unnamed company, they will be converted to stock as soon as possible.
The Target fund is a black mark on Ackman’s record, but his other special-purpose investment bets on Sears and Burger King fared better.
Even though a good number of investors may shy away because the proposition appears risky, there is bound to be interest.
“This is a bet on his investment acumen,” said Stewart Massey, chief investment officer at Massey Quick which invests with hedge funds for individuals and institutions.
This year’s returns are modest - up 6.3 percent after fees in the first half while the broader Standard & Poor’s 500 index gained 12.6 percent - but Pershing Square’s long-term returns are among the best in the industry.
“People want to feel like they are part of something special and this can make them feel that,” said one person who has money with Ackman now and speculated on how the money raising may go.
Besides betting on Ackman’s reputation, they may also like the lower fees he is offering. Management fees for this investment are 0.25 percent per year, down from the industry’s traditional 2 percent fee. Incentive fees, normally 20 percent or more, can be as low as 5 percent if an investor puts in $200 million or more.
Another trend that might help Ackman is a general shift in asset allocations in the wake of the recent bond market drubbing where investors are saying they are taking fresh interest in stock pickers. Activist hedge funds, which normally bet on stocks, are especially popular, and profitable, right now with assets having climbed six-fold to $73 billion over the last decade, data from Hedge Fund Research show.
Indeed if this fund raising effort is successful, experts say Ackman could strike at some of the industry’s very largest companies that have long been inoculated from activists’ because of their size.
“There is probably room for activism at large cap companies,” said Damien Park, managing partner at consulting firm Hedge Fund Solutions. “And while it will be tough to go after these companies, Ackman has the appetite.”
Reporting by Svea Herbst-Bayliss; Editing by Leslie Gevirtz