Big US hedge funds hit hard by Valeant sell-off
Three of the US’s biggest hedge funds have suffered billions of dollars in losses from their portfolios thanks to a sharp sell-off in the shares of Valeant Pharmaceuticals.
Bill Ackman’s Pershing Square, Jeff Ubben’s ValueAct, and John Paulson’s Paulson & Co have been hit hard this week because of their concentrated bets on Valeant, with Mr Ackman holding 30 per cent of his fund in the pharmaceutical company’s shares.
Valeant shares fell a further 5 per cent on Tuesday, adding to a 16.5 per cent plunge on Monday, as investors took fright after Democrat politicians called for a subpoena to force the company to hand over documents relating to “massive price hikes” for its drugs.
One US-based investor in hedge funds said: “Large, focused bets on single companies can lead to huge returns for managers when they go well, but destroy years of gains when they go wrong. It is always a risky strategy no matter how much of an edge a hedge fund thinks it has”.
According to US regulatory filings Mr Ackman held $4.3bn of Valeant stock at the end of June, implying the 39 per cent fall in Valeant shares since their August peak has cost his Pershing Square fund as much as $1.6bn.
Pershing Square started building its Valeant position in the first quarter of this year, with the company’s shares priced roughly where they are now at that point.
As of the middle of last month Pershing Square was narrowly down for the year, losing 0.2 per cent, according to data compiled by HSBC before the sharp fall in Valeant shares.
Other hedge funds with large chunks of their portfolios invested in Valeant include the Tiger Cub fund Tiger Ratan, and Brave Warrior Advisors, both of which held over a fifth of their assets in its shares as of the most recent US filings.
Mr Ackman has been a vocal advocate of Valeant, whose takeover-fuelled growth has attracted criticism from some other hedge fund managers such as the short seller Jim Chanos, who has argued these deals mask a lack of organic growth. Mr Ackman has defended the company, comparing Valeant to Warren Buffett’s Berkshire Hathaway.
Pershing Square was last year one of the best-performing large hedge funds in the world, gaining almost 40 per cent as it benefited from its large, concentrated bets on companies such as Allergan, which Mr Ackman had tried unsuccessfully to force to sell itself to Valeant.
Mr Ubben’s ValueAct accumulated its Valeant stake in 2006 at a far lower cost, meaning even with the recent sell-off it has made many times its initial investment. Mr Ubben joined Valeant’s board last year, and ValueAct has held a seat since 2007.
Paulson & Co had 2.6 per cent stake of the pharma company worth $2bn at the end of June, according to the most recent US filing.
A number of high-profile Wall Street hedge funds are suffering from their big focused bets on specific stocks going awry. David Einhorn’s Greenlight Capital was down 14 per cent at the end of last month.