3rd April 2017

Hedged Fund Hero Crashed to Earth

He is estimated to have lost $4bn of his investors’ money on the trade.

This week hedge fund celebrity Bill Ackman finally admitted defeat on his one-time largest holding Valeant, selling his remaining shares at a 95 per cent discount to their high point, having doubled down with more purchases as the price started to crash.

There are many lessons for investors in this disaster, chiefly the importance of diversification. At one point Valeant made up a quarter of Pershing Square’s portfolio. The Sequoia fund, managed by a colleague and classmate of Warren Buffett, had over a third of its assets in the company. Leaving aside the incredibly poor risk management of the fund managers – why on earth did investors in these funds not sell when they saw such over-sized positions? The story is a litany of classic behavioural mistakes investors make and the fact that such well-educated and experienced managers can fall down this hole is a warning to all of us to be on our guard.

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