Bruce Berkowitz Liquidates Hedge Fund

Investor Bruce Berkowitz is shutting his hedge fund and distributing its holdings to investors, including a stake in Sears Holdings Corp. Berkowitz’s Fairholme Capital Management reported the fund’s unwinding, without naming it, in a U.S. Securities and Exchange Commission filing on Oct. 13. The fund is Fairholme Partnership, which Berkowitz created roughly five years ago, according to a person familiar with the situation. Berkowitz, a contrarian and the second-largest Sears investor, is known mostly for his mutual funds and has struggled this year as some of his biggest investments have declined. He made the move in his private fund before stepping down from the ailing retailer’s board Monday. When money managers shut down a hedge fund, they often distribute the securities in the fund rather than selling and parceling out the cash to investors to avoid flooding the market with shares. It’s also done for tax purposes.

bruce berkowitz

As part of the shut down, the fund distributed 3.14 million Sears shares and warrants. Berkowitz, a Partnership investor, personally received 727,816 Sears shares and warrants on 810,345 shares, according to the filing. The remaining holdings went to Fairholme clients who were previously investors in the hedge fund. Berkowitz joined the Sears board in February 2016 and has been bullish on the department store chain even as it has bled money. The Fairholme Partnership had $409.3 million of gross assets as of April, according to a regulatory filing. In statement released Monday, Fairholme said Berkowitz joined the Sears board to better communicate his views about the retailer. “Mr. Berkowitz believes that he has achieved that objective,” according to the statement. The investor’s $2.1 billion Fairholme Fund, a registered mutual fund, has lost 6.6 percent year-to-date. It has lagged 99 percent of rivals over five years, according to data compiled by Bloomberg. In his 2017 semi-annual report to investors, Berkowitz reiterated his view that Sears has potential. “Investors may disagree on the exact path forward for Sears, but the company owns many valuable assets and there is huge value in optimizing all of them,” he wrote. Those assets include real estate that the company controls and its competitive position as an appliance seller, he said. The liquidation involves both the domestic and offshore versions of the hedge funds. Berkowitz’s Fairholme Fund holds stakes in mortgage-finance giants Fannie Mae and Freddie Mac.

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Hedge Fund Titan Bill Ackman’s Surefire Bet Turns Into a $4 Billion Loss

A little over two years ago, William A. Ackman, one of Wall Street’s brashest and most self-assured hedge fund managers, was on top of the world. A billionaire before he hit 50, he was generating double-digit gains for his investors and raking in hundreds of millions in fees for his firm and himself. Hailed as a master investor, he clinched his highflier status in the fall of 2014 by paying $90 million with some friends to buy the penthouse at One57, a 13,500-square-foot aerie in Midtown Manhattan overlooking Central Park. He didn’t plan to live there — it was an investment property — but until he sold it, the apartment would make a good party space, he told The New York Times. If Mr. Ackman were a stock, that might have been his peak.

bill ackman

Today, things are very different for him. His company’s performance is way down, he is in the midst of an expensive divorce, and on March 13, he and investors in funds run by Pershing Square Capital Management swallowed a $4 billion loss on Valeant Pharmaceuticals International, a beleaguered drug company. As bad bets go, it was one for the record books. Valeant was a big Pershing Square holding. In May 2015, Mr. Ackman said Valeant’s acquisition strategy made it “a very early-stage Berkshire,” referring to Berkshire Hathaway, Warren E. Buffett’s investment vehicle. But only a few months later, Mr. Ackman and his investors began riding Valeant’s shares all the way from $262 to $11, driven both by rival investors who had bet against Valeant’s shares and former fans who dumped the stock as bad news emerged.

As much as Mr. Ackman and investors in his $11 billion firm would like to close the book on Valeant, they cannot do so quite yet. That’s because of a Valeant-related lawsuit in a federal court in California contending that he and his firm violated securities laws in 2014. According to the plaintiffs, Pershing Square secretly acquired a stake in the pharmaceutical giant Allergan based on nonpublic information from Valeant that it intended to mount a takeover bid. This is not just any lawsuit. Damages in the case may be $2 billion, as noted by the judge who certified the litigation as a class action Wednesday. Mr. Ackman’s lawyers, who in court hearings have put potential damages at less than $1 billion, are vigorously contesting the case and contend there is no liability. Defendants in the matter, which has not received a lot of publicity recently, are Mr. Ackman, his funds, Valeant and J. Michael Pearson, the company’s former chief executive.

The case is entering a crucial stage. Court documents indicate that Mr. Ackman and Mr. Pearson have either been deposed by lawyers for the plaintiffs or will be questioned under oath soon. The documents also show that Mr. Ackman must set aside 12 hours to answer questions. Mr. Pearson was the architect of Valeant’s business model, in which the company acquired drugmakers and jacked up prices on their products. Mr. Ackman, 50, is one of the country’s best-known activist investors — taking large positions in companies and trying to use that weight to influence their direction and decision-making. Initially, Mr. Ackman praised Mr. Pearson’s strategy of acquiring rivals rather than developing drugs internally. Mr. Ackman declined to comment on the mistakes he made in Valeant or the lessons he gleaned from the loss.

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