Ackman Acknowledges ‘Mistakes’ in Letter to Investors

The activist investor William A. Ackman had some explaining to do.

After a turbulent few months, in which he resigned from the board of J.C. Penney and continued to suffer losses on his bet against Herbalife, Mr. Ackman, the head of Pershing Square Capital Management, wrote to his investors on Tuesday to provide some context on the recent headlines.

In the recent quarter, Pershing Square’s funds were virtually flat, Mr. Ackman told his investors in the letter, which was reviewed by DealBook. For the first half of the year, the returns ranged from 5.3 percent to 6.3 percent, net of fees, he said.

Mr. Ackman sounded a note of contrition, saying his firm’s investment in Penney has been a “failure.” As of Aug. 16, Penney’s stock was trading more than 40 percent below the hedge fund’s average cost in buying it, according to the letter.

“Clearly, retail has not been our strong suit, and this is duly noted,” Mr. Ackman said in the letter, in a section titled “Mistakes.”

While Mr. Ackman expressed optimism that Penney would be able to revive its sales, he said the timeframe was “difficult to determine.” He said the company’s “intrinsic value” had been “impaired.”

Mr. Ackman, who left Penney’s board last week after a public dispute with the other directors, is not alone in betting on the retailer’s turnaround, however. According to Bloomberg News, the hedge fund manager J. Kyle Bass has recently been buying the company’s secured loans.

But with Herbalife, a nutritional supplements company, investors have increasingly been taking positions against Mr. Ackman, who claims the company is an abusive pyramid scheme and is betting the stock will fall. That position has suffered hundreds of millions of dollars in losses. The company denies Mr. Ackman’s assertion.

In the letter, Mr. Ackman said he believed that the government may be closer to taking action against Herbalife â€" an outcome that would bolster his thesis.

“Over the past eight months, we have made material progress in attracting federal, state and international regulatory interest in Herbalife,” Mr. Ackman wrote. “We are not at liberty to disclose the nature of these developments, but we believe that the probability of timely aggressive regulatory intervention has increased materially.”

Mr. Ackman is also pursuing a product safety angle against the company, saying in the letter that he has been in contact with a former employee whom he calls a “whistleblower.”

Despite the losses, Mr. Ackman does not consider the Herbalife investment a failure, he said. He put it in the “undecided column.”

The media attention surrounding the firm’s recent exploits is “a natural outcome of our high-profile strategy,” Mr. Ackman said in the letter. “Activist investing requires a thick and calloused skin, and recent press coverage reinforces this point.”

The investor letter was reported earlier by The New York Post.