Money Rehab with Nicole Lapin - How to Invest Alongside the Most Successful Hedge Funds

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Starting point is 00:04:18 Well, as of this year, you can pretty much buy a piece of Bill Ackman's brain on the New York Stock Exchange. Today, I'm going to show you how to invest alongside some very famous hedge funders, which vehicles actually let you do it and the number you really need to pay attention to if you do. Option one, the closed end fund. A closed end fund raises a fixed pot of money once, then it trades on an exchange like a stock. This is a rare option. Bill Ackman, who was on the show just a bit ago, did this with his hedge fund Pershing Square. He basically launched a fund called Pershing Square USA, ticker symbol PSUS, on the New York.

Starting point is 00:04:54 Stock Exchange, it priced at $50 a share and raised about $5 billion, making it the largest closed-end fund launch in U.S. history. He simultaneously took the management company itself public under ticker PS. The pitch was basically Berkshire Hathaway, but you get in on the ground floor. Buy PSUS and your money rise alongside Ackman's portfolio. Now, Ackman has had years where his fund had returns over 50%, but it is not all sunshine and rainbows 24-7. PSUS fell 18% on the very first day of trading. As of mid-July, it was trading around $37 a share, while the actual investments inside the fund were worth almost $48 a share. Bill actually called that out when he was on the show.

Starting point is 00:05:37 So why would the same stock sell at a discount? Well, for closed-end funds, there's the share price, and then there's the value of its underlying investments. That's called net asset value or NAV. These two are different numbers. They float independently based on supply and demand. When the share price is below NAV, the fund trades at a discount. When it's above, it trades at a premium. At the time I'm recording this, PSUS is trading at roughly a 22% discount.

Starting point is 00:06:01 Ackman's older fund Pershing Square Holdings, which trades over in London and in Amsterdam, has spent years stuck at a similar discount. That discount is basically the market saying, cool portfolio, bro, but we're not paying full price for the risk that you make a bad call and we don't love your management fees. Ackman himself pointed out the PSUS discount adds up to something like 11 years worth of management fees. Option two, buy the manager, not the fund. This is the equivalent of the PS ticker that I mentioned for Pershing Square. You're buying the actual management company. When you buy a listed asset manager, you're not buying their portfolio. You're buying their fee stream.

Starting point is 00:06:39 Every dollar they manage throws off fees, whether their bets go up or they go down. This is why publicly traded giants like Blackstone and KKR have been such monsters over the last decade. My hot take here is for most people, owning the toll booth itself is smarter than owning. all the cars going through it. Managers get paid no matter what, in good years and in bad years. But know what you're buying. You're buying a fee machine, not a stock picking genius. Option three, the insurance float trick.

Starting point is 00:07:05 This one is one of my favorites. David Einhorn, legendary shortseller, the guy who called Lehman Brothers Collapse before it actually collapsed, runs a publicly traded re-insurance company called Greenlight Capital Re, ticker symbol, G-L-R-E. An insurance company collects premiums today and pays out claims, later on, right? So it's sitting on this giant pile of cash in the meantime called float. At green light, the float gets invested by Einhorn's hedge fund. So when you buy GLRE, you're getting insurance profits plus a side of Einhorn stock picks. This is the exact structure Warren Buffett used to build

Starting point is 00:07:38 Berkshire Hathaway, insurance float as free investment fuel. Speaking of which, option for V-O-G, Berkshire Hathaway, ticker symbol, BRK.B for the version that normal people can afford. I'm not exaggerating here. Berkshire Hathaway A shares are currently trading at over $768,000 a share, while B shares are trading at just over $500 a chair, and of course you can also buy them fractionally. Buffett officially handed the CEO roll off to Greg Abel on January 1st, though he is staying on as chairman. Berkshire is now sitting on a record pile of cash, nearly $400 billion, which tells you that the world's best investor is having a lot of trouble finding cheap things to be. buy right now. Just saying. I have done a whole episode on the final Buffett chapter and I'll link that in the show notes too. And last but not least, the copycat ETF. There are funds that actually scrape the required quarterly disclosures that big hedge funds have to submit to the SEC, then they

Starting point is 00:08:36 buy their most popular positions. The Global X Guru ETF, Dickerson Bull Guru, is the best known one that's still standing. Now, it sounds really smart, but here's the giant asterix. These disclosures come out up to 45 days after the quarter ends. So you're always getting delayed information. And they only show long stock positions in the U.S. not shorts, not options, not hedges that make a hedge fund, a hedge fund. I'm a little bit more skeptical on this one, but I just want you to know that it does exist. So which one is right for you? Honestly, none of these should be more than a small slice of your overall portfolio. Investing alongside a famous name is fun, but fun and diversified index fund are not in the same financial food group. But by the way, you can't spell index fund without funds.

Starting point is 00:09:24 So just saying it should be a small slice. The biggest mistake I see people make is confusing a great investor with a great investment. The people, the price and how their strategy maps onto yours are all separate questions. For today's tip, you can take straight to the bank. If you're going to buy a closed end fund like PSUS, hunt for a discount and hunt for it in December. This is a real hot tip here, but closed end funds routinely trade below the value of, what they own and that discount gets widest at the end of the year when investors are trying to dump their losers for tax write-offs in what's called tax loss harvesting. That artificial pressure can push discounts to their deepest point of the year on funds whose actual holdings

Starting point is 00:10:05 haven't changed a bit. Try to swoop in then and if you do, you're basically buying a dollar of assets for 80-something cents on the dollar. So you're not just buying the billionaire, but you're buying the billionaire on sale.

Money Rehab with Nicole Lapin - How to Invest Alongside the Most Successful Hedge Funds

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