The Only Public Hedge Fund You Should Own

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Hedge fund managers who offer shares to the general public have lost investors billions. Och-Ziff Capital Management Group LLC (NYSE: OZM) has lost over half of its value since its debut during the financial crisis. Fortress Investment Group LLC (NYSE: FIG) has lost three quarters over the same time period. But there is one hedge fund that just might live up to the hype. I'm going to tell you about it here.

Mind you, if you have $10,000 or more to invest, you can skip the whole hedge fund hoopla and invest in so called "liquidity products." These are hybrids between hedge funds and mutual funds – essentially, hedge funds that are registered with the Securities and Exchange Commission. Blackrock, Deutsche Asset Management, PIMCO and a host of others have been pumping these out in recent years.

Or, if you're determined to get alternative asset exposure, you could invest in one of the private equity firms that went public around the time of the financial crisis. The Blackstone Group LP (NYSE: BX) has treaded water, falling far behind the S&P and notching an 8%-plus gain since it went public. KKR & Co. LP (NYSE: KKR) has actually notched a 142% return since its IPO, beating the S&P handily.

But the ranks of profitable hedge funds with public shares are very thin – until now.

The Activist Investor to Watch

Between January 1, 2004, and June 30, 2014, Pershing Square Holdings Ltd. (AMS: PSH), activist investor Bill Ackman's longest-standing, privately held fund, generated a 20.8% annualized return. This equates to a 626.7% cumulative return over that period, a whopping 13.1% better per year than the return on the S&P 500 during the same time.

In 2014, Ackman's fund was one of the top performing large hedge funds (over $5 billion in assets) in the world with a net return of 32.8%.

These are the kind of outsized gains usually unavailable to the "average" investor locked out of the high-roller hedge-fund world.

But for the last eight years, a few brave fund managers have started to change the game, and let the little guy in for the ride.

Playing with "Other People's Money"

Hedge fund managers, like many denizens of Wall Street, love to play with other people's money, especially if those people cannot demand it back. Average investors normally aren't able to invest in hedge funds unless they meet certain net worth and income tests. Ackman, like Fortress's Wes Edens or Och-Ziff's Daniel Och, decided to get around this stricture by raising equity through closed end funds so investors could not pull it out at their whim.

In 2013, Ackman's performance badly trailed the S&P 500 due to well-publicized problems with an investment in J.C. Penney & Co. Inc. (NYSE: JCP) and a short position in Herbalife Ltd. (NYSE: HLF). Mr. Ackman's fund was only up 9.3% when the S&P 500 was up over 30% in 2013.

Most investors stuck with Ackman, but he wisely decided that it would be better to try to raise permanent capital in the public markets.

So in October 2014, Ackman offered shares in a closed-end fund to individual investors in a public offering on the Euronext exchange in Amsterdam at $25 per share.

The fund is called Pershing Square Holdings Ltd. (OTCMKTS: PSHZF), with Ackman raising $2.7 billion after increasing the size of the original offering from $2 billion.

In addition to the offering cash infusion, institutional investors invested an additional $1.713 billion in the offering. At closing, the fund's stable institutional-quality shareholder base included over 300 sovereign wealth funds, pension funds, endowments, foundations, funds-of-funds, family offices, and high-net-worth investors.

No single shareholder is permitted to own more than 4.75% of the fund, which is ironic in a fund managed by a well-known promoter of shareholder rights, but also supportive of liquidity in this type of structure. The closed-end fund, in addition to previous offerings, gives Ackman $4.4 billion of permanent capital that he can invest on a long-term basis.

At the end of January, PSHZF had total assets of $6.6 billion. At that time, Ackman's firm was managing a total of $18.5 billion, which means that about 1/3 of his funds are now permanent capital that cannot be withdrawn from investors. Share price of PSHZF was $26.53 per share at January 31, 2015.

Ackman runs highly concentrated portfolios where he pursues an activist strategy in which he is engaged with management to improve shareholder value.