Can Bill Ackman save the closed-end fund?

An outspoken financier wants to build a modern-day Berkshire Hathaway

An aSSET MANAGER’s job is harder than merely beating the market. They must also deal with investors’ foibles. In private, some sound like doctors complaining about patients. Everyone is an expert these days, goes the typical gripe, especially after conversing with a large language model. Yet clients still don’t know what’s good for them. Sovereign-wealth funds spurn liquidity arrangements that may drag down returns, then discover their countries urgently need cash to buy weapons. Individuals clamour for faddish, overvalued stocks, then want their money back when prices crash.

Such behaviour saps investors’ wealth and causes no end of headaches for portfolio managers. Assets must be sold at the worst possible time, crystallising losses that might otherwise have been temporary. The sizes of funds, and hence the fees they generate, can fluctuate by far more than the market. Worst of all, panicked withdrawals can force activist managers to cede control of companies before they have had a chance to turn the business around.

These kinds of considerations explain why, on April 29th, Bill Ackman raised $5bn for a new “closed-end” fund, from which clients cannot remove their capital. Pershing Square USA, listed on the New York Stock Exchange, is the largest such fund ever to have been launched. It is helped by the fact that Mr Ackman is one of the world’s best-known money managers.

He calls it his attempt to build a modern-day Berkshire Hathaway, the colossal vehicle that has made Warren Buffett into an investing icon. In fact Mr Ackman is trying something more ambitious. He wants to rehabilitate an asset class that, despite obvious attractions, has been beset by problems since before Mr Buffett bought Berkshire 61 years ago.

The closed-end fund’s original sin derives from its biggest strength: investors cannot withdraw capital, but still want the option to cash out. So the funds tend to be listed on stock exchanges, allowing investors to sell their stakes to others.

The bemusing thing is that, persistently and with few exceptions, the funds’ shares generally trade at big discounts to their underlying net asset value (NAV). CEF Advisers, a research firm, reckons that over the past 25 years the average such discount has been roughly 5%. Shares in Pershing Square Holdings, a pre-existing closed-end fund run by Mr Ackman and listed in London, currently trade for nearly a third less than its NAV.

NAV discounts cause all manner of problems. Journalists write snide columns about how they are proof of poor management, outsize fees or overvalued investments. Even worse, the discounts invite corporate raiders to air similar complaints, then buy stakes in discounted funds and try to gain control of their boards, liquidate assets and turn a quick profit. On April 30th Saba Capital, an American hedge fund, won a long and bitter such campaign against the Edinburgh Worldwide Investment Trust.

In truth, the source of NAV discounts has long been mysterious and hotly debated. A small one makes sense for a fund filled with fairly valued assets that also charges fees. One larger than a few percent is more puzzling, especially if you believe the fund’s manager can outperform the market. Way back in 1949 Benjamin Graham, Mr Buffett’s mentor, described the NAV discount as “an expensive monument erected to the inertia and stupidity of stockholders”.

Can Mr Ackman demolish it? He argues, naturally, that the discount at his London-listed fund is no reason to doubt him. It reflects the punitive taxes faced by Americans—his natural clients—when investing abroad and strict regulatory limits on marketing. The new fund’s domestic listing means it does not face the same barriers, making it easier to drum up demand. Mr Ackman’s public profile and big social-media following should help, too. He and his staff also control a large enough portion of the fund to deter hostile takeovers.

More important is whether the new Pershing Square USA can make as much money as Pershing Square Holdings. Between the debut of that fund’s predecessor in 2004 and the end of 2025, the vehicle generated annualised investor returns of 16.2% after fees, compared with 10.7% for America’s S&P 500 share index. Viewed in this light, its enduring NAV discount is a curiosity rather than a deal-breaker. A couple more decades of such outperformance and that comparison to Berkshire Hathaway might not seem arrogant. ■