Are Any Publicly Traded Hedge Funds Worth Owning?

The media has talked a lot about the carnage among hedge funds recently, but some everyday investors are living it firsthand as well. That’s not because they’ve directly invested in the big-name hedge funds, but because they’ve used public hedge fund vehicles to invest alongside the likes of Bill Ackman and Carl Icahn.
Unbeknownst to many, Bill Ackman, Carl Icahn and a host of other billionaires have public investment vehicles that mirror the stocks the fund managers are buying.
These publicly traded hedge funds are a way for hedge fund managers to get access to the capital markets to grow their assets, but it also gives them more stability by offering permanent capital.
Carl Icahn’s public vehicle is Icahn Enterprises LP (NASDAQ: IEP), while Bill Ackman has Pershing Square Holdings (OTC: PSHZF).
But just as these hedge funds have taken a beating in their portfolios, so have these publicly traded entities. Units of Icahn Enterprises have fallen 27% in the last year, while Pershing Square is down more than 40%.
Pershing’s pain is in large part driven by its stake in Valeant Pharmaceuticals International (NYSE: VRX), which has fallen 85% in the last 12 months.

Still Too Soon

For investors looking to bottom feed in these hedge fund vehicles, it still might be too early, although both Icahn and Ackman are great investors. Ackman has a long-term record that dwarfs the broader market. He’s averaged annualized returns of more than 17% since 2004, while the S&P 500 return was just 7% over the same period.
Icahn Enterprises does pay a dividend, which yields 9.2%. But Icahn Enterprises was put on notice last month by Standard & Poor’s that its credit rating might be downgraded to junk status.
The problem for Icahn hasn’t been just one stock, but a few in the commodity industry. Three of his biggest bets are Chesapeake Energy (NYSE: CHK), Freeport McMoRan (NYSE: FCX) and Cheniere Energy (NYSE: LNG), which are all down more than 40% in the last 12 months.
Ackman isn’t doing any better. He got notice this week that Standard & Poor’s is also thinking of cutting his fund’s credit rating due to its fall in net asset value. Pershing Square’s NAV has fallen from $5.3 billion in October to its present level of $3.8 billion.
Pershing appears to be trying to shore up its balance sheet, as evidenced by its trimming of its stake in Mondelez International (NASDAQ: MDLZ) last week. Still, it’s not clear how the Valeant stake will shake out, with fears lingering that the company could default on its debt.
As for Icahn, his big bets on the commodity industry haven’t played out, and he’s very beholden to commodity prices, which are proving increasingly volatile.

Enough Pain to Go Around

Now, there are two other hedge fund managers with public vehicles, both of which are reinsurers.
First is Dan Loeb’s Third Point Reinsurance Ltd. (NYSE: TPRE), which is down 20% in the last year.
Then there’s David Einhorn’s Greenlight Capital Re Ltd. (NASDAQ: GLRE), which has fallen more than the Icahn and Loeb vehicles. It’s off 33% over the last year.
It appears that Einhorn is on the right track so far this year, with his fund up 3.3% through February. This comes as Einhorn made some major changes heading into 2016. He sold off key losers like SunEdison (NYSE: SUNE) and Micron Technology (NASDAQ: MU). Meanwhile, he made bold new bets on Mylan (NASDAQ: MYL) and Macy’s (NYSE: M).
However, Third Point might be the better play for investors looking to piggyback on hedge funds. Greenlight Capital’s fund trades at 97% of book value, while Third Point Reinsurance trades at 86%. Compare that to the 200% of book value that Icahn Enterprises trades at.
Third Point is also taking a more cautious approach in 2016, with Loeb noting that his fund has decided to reduce its net exposure to the market.
Everyday investors can’t invest in hedge funds without having a small fortune tucked away or a salary of more than six figures. However, the publicly listed hedge funds give investors the opportunity to invest with some of the biggest and best hedge fund managers around. It also offers yet another angle for diversification.
If you want to use the recent sell-off as a buying opportunity, Loeb’s Third Point Reinsurance appears to be the best bet.

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