How The Fast Money Gamblers Got Eviscerated By Valeant

BY SVEA HERBST-BAYLISS AND LAWRENCE DELEVINGNE at Reuters

Oct 22 Valeant Pharmaceuticals' market slide has hurt the returns of several large U.S. hedge funds, but for smaller players with outsized bets on the drug company the fallout could be far more painful, according to industry watchers.

Among smaller hedge funds invested in Valeant, at least three had more than 20 percent of their assets tied up in the stock as of June 30, according to data from Symmetric.IO, a research firm that provided the data to Reuters on Thursday. They include Tiger Ratan Capital Management, Marble Arch Investments, and Brave Warrior Advisors, according to the numbers, which are based on publicly reported stock positions and may not include hedges.

It is not known whether the funds have maintained their holdings into this week, but if they did, they could be looking at losses worth hundreds of millions of dollars.

"The major risk is with funds that have an unstable, short- term oriented capital base, where a poor few months of performance can lead to significant capital flight," said Jonathan Liggett, Managing Member at JL Squared Group, an investment advisor. Smaller hedge funds can quickly collapse if investors demand their money back all at once, forcing managers to exit profitable positions to raise cash quickly.

Valeant shares are down 35 percent this week after a short-seller's report accused the company of improperly inflating revenues, igniting fears about federal prosecutors' probes into its pricing and distribution.

Valeant has denied the allegations and its Chief Executive Michael Pearson and other board members are due to address them in more detail in a call with investors on Monday.

The slump has trimmed billions of dollars off the ledgers of investors such as hedge fund mogul William Ackman's Pershing Square Capital Management, activist hedge fund ValueAct Capital, and investment firm Ruane, Cunniff & Goldfarb.

BETS ON EARLY WINNER

But the impact could be far worse at smaller funds that typically have less than $5 billion in assets and also bet on a stock that had been one of this year's early winners.

Nehal Chopra's Tiger Ratan owned roughly 1 million shares of Valeant at the end of the second quarter, accounting for about one fifth of her $1.6 billion fund, according to public disclosures. She has owned Valeant for 2-1/2 years.

Through August, Chopra had been one of the year's best performers, showing a gain of 21.6 percent for the year. But people familiar with her numbers said heavy losses in September wiped out all gains putting the fund into the red for the year.

If the firm still held that Valeant position this week its losses on that bet alone would have totaled roughly $370 million for the week. Tiger Ratan declined to comment.

Valeant shares, which hit a record high of $263.81 on Aug 6, closed at $109.87 on Thursday.

Other big investors in Valeant at the end of the second quarter included Marble Arch, which oversees roughly $2.3 billion and owned 1.07 million shares, making up 20 percent of its book, data from Symmetric.IO show.

At Glenn Greenberg's Brave Warrior Advisors, Valeant made up 36.5 percent of the roughly $3.3 billion fund. Incline Global Management, a $422 million fund, owned 91,368 shares on June 30, translating into a 5.61 percent position, according to the data.

None of the firms responded to requests for comment.

Some other firms including Barry Rosenstein's $11 billion Jana Partners and Jeremy Green's Redmile Group, for example, sold Valeant in recent weeks, helping them sidestep this week's selloff, people familiar with their investments said.

Jana's flagship fund trimmed some of its losses for the year with a 2.2 percent gain in early October, leaving the fund down 4.5 percent for the year through October 16.

Locust Wood told clients in a letter, seen by Reuters, that the firm exited Valeant last month. "We took advantage of the downturn in September to move our Valeant holding into Allergan," the letter said. Last year Botox maker Allergan Inc rejected a hostile takeover bid from Valeant. The letter said that its bet on Valeant netted the firm a 23 percent gain overall.

Some investors said some funds, such as Tiger Ratan, which performed well in recent years, might count on investors forgiving an off year. But smaller funds that showed less dramatic gains might be in a tougher spot.

For much of the year, Valeant's quick paced acquisitions helped boost its stock price and made it a favorite with hedge funds which owned roughly 22 percent of the company's stock at the end of the second quarter, data from Goldman Sachs show. (Reporting by Svea Herbst-Bayliss and Lawrence Delevingne; editing by Richard Valdmanis, Carmel Crimmins and Tomasz Janowski)

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