The Hedge Fund Report Card

February 11, 2016   Stephen Taub

Performance isn’t the only factor that determines how well a firm fares in the eyes of its investors — but it’s by far the most important.

Illustration by Matthew Hollister

Last year was a disaster for William Ackman’s Pershing Square Capital Management. The New York–based activist hedge fund firm posted a 20.5 percent loss, the worst year in its 13-year history, and endured widespread criticism for two of its worst-performing bets: its huge stake in controversial drugmaker Valeant Pharmaceuticals International and its high-profile shorting of Herbalife, a multilevel marketer of nutritional products.

Ackman himself is among his biggest critics. In his firm’s annual letter, he conceded that "2015 is a year we will not forget. . . . The first place to look for an explanation is mistakes we made in 2015, and we did make some important mistakes." These sharp setbacks provided plenty of fodder for Ackman’s critics, who continue to sneer at what they deride as his slick, self-promoting style.

Investors in Ackman’s funds, however, don’t seem too concerned about the manager or...

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