Jan. 7 (Bloomberg) -- Pershing Square International Ltd., the biggest hedge fund of activist investor William Ackman, lost 12 percent in 2008, less than industry average.

The fund fell 0.2 percent in December, New York-based Pershing said in a Jan. 6 letter to investors, a copy of which was obtained by Bloomberg News. It lost money on retailer Target Corp., which dropped 31 percent last year, soft-drink maker Dr Pepper Snapple Group Inc. and book-store chains Borders Group Inc. and Barnes & Noble Inc.

The Standard & Poor’s 500 Index sank 38 percent last year, the biggest U.S. stock-market decline since 1937. Ackman, 42, outperformed peers that slumped about 20 percent on average in 2008, the worst year for hedge funds since Chicago-based Hedge Fund Research Inc. started tracking them in 1990.

“That is terrific performance,” said Peter Rup, chief investment officer at New York-based Orion Capital Management LLC, which invests in hedge funds. Ackman declined to comment.

The Pershing Square fund profited last year from investments in Wachovia Corp. and Longs Drug Stores Corp., which were both acquired, and selling short bond insurers MBIA Inc. and Financial Security Assurance Holdings Ltd. Selling short is the practice of borrowing stocks and selling them in the hope that their price will decrease. A short seller buys back the shares and returns them to their owners, pocketing the difference.

Off Target

Pershing and Ackman spent about $2 billion in 2007 for a stake in Minneapolis-based Target, the second-largest U.S. discount chain. Ackman, who controls 9.5 percent of the company, has since pressed Target to buy back shares, sell its credit- card unit and get more value from its real estate.

Ackman’s Pershing Square IV fund, which holds only Target securities, fell 68 percent last year. The fund is structured so that its returns to investors double the stock’s movement.

Ackman’s Pershing Square Capital Management LP manages $4.78 billion. The international fund has $2.96 billion in assets, including a $1.6 billion of credit default swaps.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporters on this story: Joshua Fineman in New York at jfineman@bloomberg.net;

Last Updated: January 7, 2009 18:40 EST