Bill Ackman's New Closed-End Fund Trades 20% Below Its IPO Price. Is the Berkshire-Style Bet Broken?

Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) was a way for people to invest alongside CEO Warren Buffett. Buffett has retired, so the company is now run by Greg Abel, his hand-picked successor. Pershing Square USA (NYSE: PSUS) is a way for people to invest alongside another famous investor, Bill Ackman. But it isn't anything like Berkshire Hathaway. Here's what you need to know as you look at the discounted price of Pershing Square USA.

One dollar of investments for eighty cents?

Berkshire Hathaway is an operating company, meaning that it owns and runs businesses. The list of businesses is huge, including insurance, utilities, railroads, and home builders, among others. It also owns stakes in publicly traded companies. The giant conglomerate is a very complex investment that provided a way to trade alongside famous investor Warren Buffett. Abel still has to prove himself as an investor, but he was trained by Buffett, so it is unlikely the company's approach will change dramatically.

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Seeing the success Buffett achieved, other famous investors have also introduced public vehicles. For example, Bill Ackman is building a Buffett-like business around Howard Hughes Holdings (NYSE: HHH). Like Berkshire Hathaway, Howard Hughes Holdings is an operating company, and it just bought an insurance business to mimic the Buffett formula. That said, the business is still a work in progress, as it has only just established the structure it hopes to capitalize on over the long term.

However, Ackman also created Pershing Square USA, a closed-end fund. It is a more direct way to invest alongside Bill Ackman. Like a mutual fund, a closed-end fund is a passthrough entity that owns a collection of stocks and/or bonds. The value of a mutual fund and a closed-end fund, the net asset value, is just the value of their investment portfolios. But a closed-end fund isn't a mutual fund or an operating company, so there are some important nuances to consider.

Most notably, closed-end funds trade on the stock exchange based on supply and demand like a stock, but they also have a net asset value per share (NAV), like a mutual fund. NAV per share is the portfolio's value divided by the number of shares outstanding. Mutual funds are bought and sold at NAV at the end of each trading day from the fund's sponsor, so you never pay more or less than NAV. Closed-end funds issue a set number of shares when they hold their initial public offerings, so the share count doesn't change even though the value of the portfolio changes every day. The price of a closed-end fund and its NAV don't always match, and Pershing Square USA's current discount is around 20%. That means you can buy $1 worth of assets that Bill Ackman has selected for $0.80.

Don't get too excited about the discount

That sounds great, but closed-end funds often trade at discounts for long periods. Sometimes, closed-end funds can trade at a premium, but that's less common. If you buy Pershing Square USA, you are effectively giving Bill Ackman your money to run. He's a highly respected investor, so that's not necessarily a bad idea. But make sure that's what you want to do. A discount alone isn't the only reason you should be buying any closed-end fund.

However, if you do want to invest alongside Bill Ackman, you can do it at a deeply discounted price right now with Pershing Square USA. That could be an attractive option, perhaps even better than what you'd get from buying Ackman-run Howard Hughes Holdings. But Pershing Square USA is more like a mutual fund, even though it trades like a stock, than a Berkshire Hathaway clone. If you want Ackman's attempt at mimicking Berkshire Hathaway, you'll have to look to Howard Hughes Holdings.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Howard Hughes. The Motley Fool has a disclosure policy.