ValueWalk

Cracking Bill Ackman’s Big Secret Short

Because of the new Pershing Square Holdings reporting regime and disclosure requirements, you can create a relatively straightforward model based upon Pershing’s NAV, long/short exposure and returns that surprisingly narrow the field of his new short position dramatically. You go from thousands of companies to less than ten all with simple math.

The trick? There is no trick. In the effort to maintain his concentrated activist long/short portfolio and raise his ever-coveted permanent capital, he started with one short position on the books before initiating a second. The first position is a name we all know and loved/hated (depending on the reader). The second one Bill Ackman has been avidly guard-dogging for months.

Bill Ackman’s known short position

We know in September and October that his only sizable short (50bps or greater) was in one company, Herbalife. We also know fund performance and exposure over that period, so we can easily back out Herbalife’s net contribution/loss to the fund. It is solely because we know he only had one single short, and thus can very easily track its performance going in, so we can deduce his actual position size in Herbalife, with is roughly equivalent to 8.8 million shares in the reported fund, which mirrors Pershing Square Capital Management’s total holdings. So Pershing in aggregate is short roughly 26 million shares of Herbalife across the total fund.

We can use his September/October Herbalife performance to set the baseline for November, when is when he began adding his new short. We can also use this to back out the net contribution of Herbalife in November. Simultaneously, we can deduce the net contribution of both Herbalife and the new short over the following months by using Herbalife’s performance, short contribution, market cap classification and gross short exposure levels. Pershing’s Herbalife holdings lost 124bps in October and subsequently added 129, 74 and 97 bps in November, December and January respectively.

At the same time, we can determine how many points the new short position had to contribute because the total short contribution, long contribution and NAV is reported, leaving us with -30, +35 and +2 bps in November, December and January for the new short’s return. By cross-referencing Bloomberg data, you can quickly set up a screen for a North American company that is >$5B market cap that was up X% in November and down Y% & Z% in December & January. Again, we know the directionality of the move only because we know he only has two shorts and we know how the known short performed.

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By way of example, if his aggregate short basket of two positions contributed 3% to the fund’s gross and HLF would have added 4% to the fund’s gross, we know he had to have lost 1% of the fund on the new short. Because we know the new position’s exposure and its % contribution to the fund, you can back out what the dollar loss on the position was because we know how much of the fund was tied up in it. Once you know the dollar loss on the position, and its size (again, we know this because we know Herbalife’s size, the fund size and the new short’s exposure), you can figure out what the stock itself had to do in the corresponding month. For example:

The new short had to lose 30bps in November for shorts to contribute 0.99% because Herbalife itself generated 129 bps in the same period. This means he had to lose roughly $18.5 million in that period for his fund to perform as reported. You can do this for each month and quickly deduce a basket of potential companies.

In the simplest explanation, we know that whatever the new short is had to go up in November and then down in both December and January. If you define the performance ranges based upon the required performance you calculate, you quickly generate a pretty narrow range of companies.

Top five candidates for Bill Ackman’s secret short

My top 5 list of candidates based on the described criteria is as follows based on a Bloomberg Terminal screen (one of the many screens we ran):

Note we ran this screen before we added additional criteria – which ruled out many of these names besides NRG and excluded a few names mentioned above

 

There had been a lot of rumors that he was short a company that was doing things which were un-American. I’ve heard noisy rumors he was short McDonald’s, Transocean and Whole Foods Market too. Also there’s lots of chatter about him being short energy in some way. You can quickly dispel the RIG & WFM rumors by looking at their performance over that period. RIG declined almost 25% in November, so we can rule that out (Remember, we know his short moved against him.), and WFM did in fact go up in value in November, but it was by almost 25%, which is way too high (He would have lost more on the position in November than is possible by the numbers).

He’s recently said that he only trades in companies he’s got a real edge, and Actavis (ACT) would be all too obvious (huge position in company being acquired by ACT, met with ACT management etc.). In light of his recent comments that the new position was some sort of “hedge,” ACT would almost seem like the winner. Unfortunately, ACT was up in January, and we know his position moved with him, not against him, in January.

Lots of chatter about Wal-Mart (WMT) being the short too. It moved against him in November and declined in both December and January, but alas, it didn’t decline enough to meet the necessary marks.

Zoetis (ZTS) is interesting, but only because he’s got a huge long position in it. It does fit the pattern, although it looks like it moved a bit too much against him in November to fit really nicely with the math. Plus, it’d be pretty silly to initiate a huge long position in the company and simultaneously short it before you’ve got an acquiring bid, so ZTS is just a dumb choice for the short.

Best Buy (BBY) kind of fits: it would have moved against him in November and worked for him in December and January. I don’t think its the one though because it wouldn’t have worked enough for him in December. BBY was only down 1%.

That leaves us with NRG Energy (NRG) as the top pick. Why NRG? Well, NRG was up 4.2% in November and then down 13.8% and 8.4% in December & January respectively. Pretty much nails it on the necessary performance numbers. Then on top of that, add in the fact that Pershing recently appointed Stephen Fraidin (Kirkland & Ellis) as Pershing Square’s Vice Chairman. Guess what firm served as adviser to NRG in countless transactions (and has 35 lawyers working for the company)? That’s right, Kirkland & Ellis. It gets better though. Guess what firm is Pershing’s go-to firm for all things M&A? Kirkland & Ellis. Too many lawyers at the firm to list. Guess who was right there next to Bill Ackman in his Valeant / Allergan fight? K&E!

There is more we could add in, but we do not want to bore readers and feel there is enough info to make the case in this post.

That’s why I think Bill Ackman is Short NRG. Ackman has told some people privately that the short is just a hedge and not large, but even if NRG is wrong, it seems almost impossible that this is a small position. In fact, it may be much larger than Herbalife. Pershing Square declined to comment for this story, but as the firm was building up the short at the time (and would cost clients lots of money if the info was made public, Pershing SHOULD probably protect it at all costs) and does not want there to be publicity like there was for the Herbalife short. It would make sense that Ackman would try his best to protect the info.

Readers can send their guess in by email or vote below (best method unless they want to explain in confidence), and we will follow up with another post.

Full disclosure: No position

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