Ackman paying a hefty price at Target
But the hedge fund manager is still banking on a sharp bounce in the retailer's shares.
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| Pershing's William Ackman is standing by his fund's investment in Target. |
NEW YORK (Fortune) -- A foray into discount retailer Target has been no bargain for hedge fund manager William Ackman.
The high-profile manager of Pershing Square Capital Management caught the market's eye in a big way last summer, when he announced that he had raised about $2 billion to funnel into the stock and options of Minneapolis-based Target (TGT, Fortune 500). Ackman's Pershing Square IV fund has since bought up nearly 10% of the company.
But the trade has been a disaster for Pershing Square and for one of Pershing Square IV's biggest investors, insurer Leucadia National (LUK). The Pershing fund is down 43% since its June 1, 2007, launch, according to financials included in Leucadia's recently filed 10-K report.
As of Dec. 31, the portfolio was valued at slightly more than $1.12 billion - a decline of some $857 million in seven months. Pershing Square IV realized $40.8 million in stock losses and, as of Dec. 31, was sitting on $722.3 million in unrealized paper losses, the Leucadia filing indicates. That document also lists $93.9 million in realized losses from Pershing's derivative contracts, the majority of which are presumably call options. The fund uses 2-1 leverage.
It's not hard to see the root of the pain. Target's stock, which shot up north of $70 last year on news of Ackman's investment, has settled into the low $50 range. Ackman says "it is to [Pershing Square IV's] and the company's benefit that the stock price is low," because Target is "in the process of executing the largest stock buyback in its history."
A spokeswoman for Leucadia didn't return a call seeking comment.
Pershing's suffering is not for want of ambition. In a Dec. 27 investor letter, Ackman argued that the stock could be worth $120 within 36 months. He also suggested selling off Target's credit-card portfolio, completing its previously announced $10 billion stock buy-back, and - in what has become something of Ackman's signature management demand - increasing cash-flows based on the value of Target's real estate holdings. He estimated that Target has some $42 billion worth of property value it can unlock.
While it is tempting to scoff at the performance woes, it is important to recall that Ackman and his Pershing Square team have reaped some remarkable successes with an investing style that is patient and methodical.
In a situation that broadly parallels Ackman's approach to Target, he proposed large share buybacks and sale-leaseback transactions for McDonald's (MCD, Fortune 500). McDonald's shares have risen sharply since Ackman started buying the stock back at the end of 2005.
Another example in which Ackman's patience paid off is in the troubled monoline insurers Ambac (ABK) and MBIA (MBIA), whose shares have plunged over the past year - more than five years after Ackman began agitating about problems at MBIA.
While Ackman wouldn't discuss his strategy beyond what was in the public record, he did say of his efforts to boost shareholder value at the retailer, "I don't think Target should take five years." 
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