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Valeant Short Sellers Net 343% Profit as Eyes Turn to John Paulson
As Bill Ackman and Pershing Square Capital Management are licking their recent wounds due to well-publicized trades in Herbalife Ltd. (NYSE:HLF) and Valeant Pharmaceuticals (NYSE:VRX), there are winners as well as losers. As short sellers count their profits, and gradually reduce their exposure, they eye hedge fund manager John Paulson, whose Paulson & Company is still long the stock, for a squeeze opportunity.
Ackman’s loss puts him in the top five of all hedge fund gross dollar losses
When the dust cleared and Ackman liquidated his 27.2 million shares of Valeant Pharmaceuticals this week at prices ranging from $11.10 to $11.40, the activist hedge fund manager posted losses of between $2.8 billion and $4 billion, according to research from financial analytics firm S3 Partners‘ Ihor Dusaniwsky.
This feat might have put Ackman in rarified company. When Long Term Capital Management lost $4 billion in 1998 – the Nobel Prize-winning economists that ran the fund said their arbitrage strategy had zero risk – it was only the second largest loss in history. Both of these losses pale in comparison to the largest loss in hedge fund history.
In 2006 Amaranth Advisors lost $6 billion trading natural gas futures, losing $5 billion in one week as risk models were discovered to be faulty. The fund was long energy exposure as weak natural gas prices predominated due to mild winter conditions and a hurricane season that didn’t deliver the punch Amaranth expected.
While Ackman wasn’t relying on something as unpredictable as hurricanes to deliver returns, the fund manager – with an impressive track record delivering 20% or more every year – is currently at a low and many allocators might now think his runway is clear and invest on the dip. At the same time Ackman lost, other fund managers benefited.
Short sellers in Valeant Pharmaceuticals were massive winners. The short thesis, unearthed by independent journalist Roddy Boyd of the Southern Investigative Reporting Foundation and advanced by short sellers such as Andrew Left of Citron Research, earned an incredible return. Short sellers average position was $801 million, according to Dusaniwsky’s research, generating a profit of 343.45%. In terms of raw numbers the data shows that VRX Short Sellers are Up $2.8 billion since August 2015. Early short sellers also included Jim Chanos of Kynikos and David Neuhauser of Livermore Partners.
Short sellers began attacking Valeant during the second half of 2015 after the stock hit its historic high of $262.52 on August 5th. At the time the strategy of rolling up pharmaceutical concerns to obtain pricing power couldn’t miss. What wasn’t known to investors was what lay underneath the firm, issues that Boyd and Left pushed hard.
But now with Valeant stock near all-time lows, shorts appear to be lightening up their exposure. Short interest currently stands at $572 million and dropping. Each $1 drop in the stock price results in another $50 million in profit for the short sellers, says Dusaniwsky, who points out that Ackman’s recent stock sale pushed the price down by $1.22.
The short sellers have they eyes on another Valeant long they would like to squeeze: John Paulson. Short sellers have to make a decision to wait for Paulson to exit his position and then take profits – potentially earning another $60 million – or just take their profits on a trade that ranks among the hedge fund industry’s largest dollar gains on large cap individual name short exposure.
This article was originally published in ValueWalk.