Way Off Target

Here's a very simple example of how leverage can cause investments to go very wrong when it doesn't help them go very right.

Bill Ackman's Pershing Square IV fund invests exclusively in Target. Shares of Target fell 31 percent in 2008 while investors in Ackman's Target fund lost 68 percent, according to Bloomberg.

This is especially painful considering the fund suffered a 43 percent decline in 2007. Ackman invested $2 billion in Target that year and his firm currently controls 9.5 percent of the company.

Now, it's worth noting that Ackman isn't a big proponent of using leverage in hedge funds generally. But he believes that single investment vehicles like the one invested in Target can benefit from it.

Indeed, they can. If Target had gone north instead of south, investors would have made double the returns the stock would have made in the open market.

This is why Ackman has been so outspoken about affecting change at Target. He succeeded at getting the company to buy back shares and sell off part of its credit card portfolio.

And late last year, he proposed that the retailer spin of its land investments into a separate, publicly-traded real estate investment trust. Such a move, he argued, would free up cash and create more value for Target shareholders. So far, however, the company has dismissed the idea.

Indeed, the idea may just be a bit before its time. In his annual closing dinner Dealbook column today, Andrew Ross Sorkin advises Ackman to give it five years.

If only his investors can sit tight for that long.

by Megan Barnett