Lessons From Pershing Square's Ackman

By Eric Jackson, Senior Contributor

03/03/10 - 06:24 AM EST

Stock quotes in this article: GGWPQ.PK , SPG , BAM , VRO , TGT , BGP , MBI

Last week, I got a chance to hear a speech by William Ackman, the CEO and founder of hedge fund Pershing Square Capital Management. If you're not familiar with this activist investor you should be, because his investment approach offers some valuable lessons.

Ackman's been in the news a lot over the past year or so.

Bill Ackman, CEO of Pershing Square Capital Management.

He took a long position in General Growth Properties(GGWPQ.PK Quote) in November 2008 and then watched the stock go from 35 cents to more than $13. The company is now the subject of a bidding war between Simon Property(SPG Quote), Brookfield Asset Management(BAM Quote) and possibly Westfield and Vornado Realty Trust(VRO Quote)

He also ran a high-profile proxy contest against Target(TGT Quote) last year that failed to win him a seat on the retailer's board, although Target's shares are still still up substantially since he launched the contest.

Unlike most funds run by activist investors, Ackman's is not a long-only fund. He typically holds eight to 10 positions, with a couple of those being short. Because of that positioning, he's done well over the last few years and has remained active and outspoken.

Always a good speaker, Ackman has definitely ramped up his media appearances over the past couple of years. Pershing Square now manages more than $6 billion in assets, with a team of six investment professionals including Ackman.

Ackman describes the fund's strategy as "concentrated, fundamental, research-intensive, and long-short." The fund charges investors 1.5% in annual management fees and 20% in incentive fees.

Pershing Square has averaged 24% annualized returns since its founding in 2002. At the moment, the fund is 23% in cash.

It never uses leverage and almost never invests in industries that use a lot of leverage, are highly sensitive to interest-rate shifts or are commodity-related. (According to Ackman, the one investment that violated this rule was Borders(BGP Quote), which has lost 95% of its value since Ackman invested in it, although Ackman says at these levels it's a great value.)

Ackman wouldn't describe his firm's strategy as activist, either on the long side when he's gone to battle with Target or on the short side such as with bond insurer MBIA(MBI Quote), which Pershing Square first shorted in 2002.

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