shutterstock_145146025Hedge fund manager Bill Ackman used the F word – failure – to describe his disastrous investment in retailer J.C. Penney.  Mr. Ackman’s admission was honest, surprising and very shrewd. It is a risk that likely will pay off handsomely in the months ahead.

Of course, Mr. Ackman, the head of of Pershing Square Capital Management, surely has used the other F word plenty of times, but this was formal letter to his investors, after all., and some restraint was required.  Still, Mr.Ackman’s letter pulled no punches. It acknowledged the fund’s poor performance and disappointing investments in Penney and Herbalife.

Calling the investment in Penney a failure was not easy, especially for a world-striding hedge fund master.  But the admission serves several useful purposes:

1.  It is the quickest way to turn the page.   The saga at J.C. Penney will continue as the company tries to regain its footing, but Mr. Ackman will no longer be part of the story.  The news will no longer be about his role but about the company’s turnaround.  Judging by the awful earnings that Penney posted last week, that story has a long way to run.  It was no accident that the letter was leaked to the press (the New York Post had it first), because Mr. Ackman wants everyone to know he’s moving on.

2. It allows Mr. Ackman to frame the episode on his terms.  Mr. Ackman would prefer that J.C. Penny be viewed as an investment failure – a good bet gone wrong – rather than a failure of his leadership or management skills.  After all, Mr. Ackman not only committed the fund’s capital, he pushed hard for a new CEO – Ron Johnson – and a bold new strategy.  Both flopped, and Mr. Ackman’s relations with fellow board members were very strained in the process, too.  The record suggests his conduct made a risky investment even more perilous.  It’s much better for him to call it an investment failure and move on.

3. It answers the first question every LP would have asked.  It’s easy to imagine the nightmare at Pershing Square when every conversation with an investor starts with a question about the J.C. Penney investment.  By addressing the issue candidly in a letter, those conversations can get to more productive business issues. Investors will still have tough questions for Mr. Ackman, but the letter gets the first one out of the way.

4.  It keeps his activist cred intact.  Mr. Ackman’s investment strategy relies on pointing out the failures in companies he targets. When urging boards to make changes, he’s asking them to admit mistakes, just as he has done.  If Mr. Ackman can admit failure, they should be able to do the same.

Bill Ackman accomplished a lot by admitting failure.  Who knew the F word could prove so useful?