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1

What kind of Hedgefund is Bill Ackmans Pershing Square?

Event Driven: Activist Investor

2

What is Herbalife?
What was Bill Ackmans Position to Herbalife and what did Icahn?

Herbalife is a nutrition company, which products are only available through its distributors (Multilevel Marketing)

Ackman: Herbalife is a pyramid scheme --> Shorted: $45 -> $0
Icahn: --> Long position
(Daniel Loeb had a long position too)

3

What is one primary strategic move of an Activist investor?

Long:
Obtain representation on the board of directors to impact the firm's policy and unlock shareholder values (such as share buybacks)

Short:
Publicly talks down the security

4

Risk rating of an Activist investor (especially Pershing square)

Leverage permission: leverage positions
Portfolio concentration: High portfolio concentration
Key man risk

Regulatory risk (changes in regulations)
Reputational damage (negative publicity could impact manager on influencing companies)
Exposure Risk (Limited visibility over portfolio exposures)
Short risk (Short squeeze)

5

Short interest

Number of shares of a security, which are sold short and have not been settled yet (no repurchase)
Outstanding short positions on the market

6

Multilevel Marketing (Herbalife)

Individuals earn commission by selling products
and
for sales made by people THEY RECRUIT

Legitimate multilevel-marketing: Earnings are based on selling
Illegitimate pyramid scheme: Earnings are ALSO based on recruiting

7

Pershing Square Strengths, Weaknesses, Opportunities, Threads

Strengths: High concentration of investments + lower fee

Weaknesses: Key man risk, low diversification

Opportunities: Flexible mandate

Threats: Regulatory

8

Expose to Style Premia? (AQR)

If an investor is not already exposed to style premia, it is alpha to them:

Alpha (vor CAPM) + Equity Beta (mit CAPM) + Other Market Beta (Fama-French 3 factor model) + Hedgefund Beta

9

What are the 4 different style premia of AQR?

Carry (different yield between markets)
Momentum (Performance based on recent history)
Defensive (Assets with low beta have, relative to risk, higher yields compared to assets with high beta)
Value (Intrinsic value)

10

Carry trade

Invest in markets with high yield through borrowing on markets with low yield
Carry = Yield(long) - Yield(short)
Yield(long) > Yield(short)

11

Defensive

Anomaly of low beta: Betting against beta
Assets with low beta long -- Assets with high beta short
Risk premia in reality lower than predicted by CAPM --> Lower sharpe ratios (especially for high volatility)

12

Momentum

Physics: Momentum = Weight * speed
Trend: Rising prices create more demand
Payoff like a long straddle (CTA)
Problem: Momentum has problems with correlations.

13

Value

Intrinsic Value ≠ Stock price --> market inefficiency
DCF & Multiples
Price < intrinsic value --> Long and vice versa

14

Schedule 13D

Regulatory disclosure of positions to SEC and showing the intention of activistic activity

--> Abnormal trading vol. before and after filing

15

Activist Strategy

Buy stocks --> SEC filing --> Contact Management --> Cooperation vs. Confrontation --> Formal shareholder applications --> Judicial --> Corporate transaction

Hedge funds often use help of other shareholders

16

Negative externalities of activist investors

Reduced influence of corporate boards on management
Higher discretion in firms
They only listen to the most important investors
Only symbolic reactions

17

Positive externalities of activist investors

Institutional investors (intermediaries) have no incentive to help out companies
--> Hedgefunds do governance intervention --> Can reduce agency costs

18

Was ist Netto, was ist Brutto exposure?

Eine Bank, die in ihrem gesamten Devisenbestand 120 % „Long“ und 50 % „Short“-Positionen aufweist, besitzt eine Netto-Exposure von 70 %.

Als Brutto-Exposure (englisch gross-exposure) bezeichnet man die Addition von „Long“- und „Short“-Positionen, um die Summe aller offenen Positionen erkennen zu können.

19

Long Short Equity Strategy

Instruments: Long (Stocks, which are undervalued) & short (Stocks, which are overvalued) + Leverage

Risk: Strategy does not work;
Beta Mismatching: If market is declining strongly, the long positions lose more, than the short positions win

Idea: Use Spread between valuations and minimize market risk

20

Reasons for shortselling

Claims are way too aggressive
Claims do not get corrected
Inventory does not show all needed goods
Securities not mark to marked
Assets inflationary indexed
Bad conditions for leverage
Stupid assets in inventory

21

Value Investing versus Growth investing

Value investing:
Stocks are cheap/expensive compared to a benchmark
Watch stocks with high cash flows / trading below multiple

Growth Investing:
Analytical on capital, earnings and growth
Big numbers in past or future growth, sales, market share

22

Absolute return investing

Have big return independent of market situation
--> Watch only on absolute return at the end of the year

23

Pairs Risk

Widening spreads between long and short

24

Einhorn Effect

Sharp drop in prices, after einhorn announces a short position

25

Event-driven strategy:

Method: Speculation on special events + exploit valuation inefficiencies + Catalyst
Market: M&A (bull) -- Special situations -- Distressed (bear)
Examples: insolvency, m&a, restructuring etc.

26

Risks of Event Driven Distressed?

Liquidity risk: Forced liquidation of the company
Valuation Risk: no transparency, false information
Market Risk: Too high price, market crash
Judicial risk: J-Factor, restructuring fail due to judge
Holding Risk: Term effect, holding period too long
Buying Defective merchandise: buying liabilities

27

Funds - Managers - Strategies

Pershing Square -- Bill Ackman -- Activist
AQR -- Clifford Asness -- (everything?)
Third Point -- Daniel Loeb -- Activist
Greenlight -- David Einhorn -- Long Short Equity
Appaloosa -- David Tepper -- Distressed Securities
Kynikos -- James Chanos -- Short bias (fundamental)
Tiger Management -- Julian Robertson -- Global Makro
Citadel -- Kenneth Griffin -- (everything?) Convertible Arbitrage
Scion Capital -- Michael Burry -- Value
Elliot -- Paul Singer -- Distressed
Tudor -- Paul Tudor Jones -- Global Macro / LS Equity
Bridgewater -- Ray Dalio -- Global Macro / Risk parity
Duqueske -- Druckenmiller -- Global Macro/LS Equity

28

Short selling through fundamental analysis: What to watch

Leverage bubbles
Old technology -- bad valuation
Suspect accounting
One Trick Pony -- only one product (patents)

29

What is Enron, what did it develop to and why did it fail?

Operator of gaspipelines --> energy bank --> enron online

Creative Accounting:
Conflict of interest with other (SPE) companies
No consolidation of leverage
Insider Selling
Front loading of profits
Mark to market accounting -- way to high valuation
Return on equity way smaller than cost of equity

30

Typical questions for hedgefunds

How do the cashflows have to change to validate the price of today?