Feb. 6 (Bloomberg) -- William Ackman’s hedge fund that invests solely in Target Corp. fell 40.1 percent in January, bringing the loss since inception to 89.5 percent, according to a letter sent to investors.

The decline in Pershing Square IV fund was about four times that of Target shares in January because Ackman made his bet using options rather than owning the underlying stock, which tumbled 9.6 percent. Ackman said he will personally add another $25 million to the fund, and employees and board members will put up more cash.

“While PSIV and Target stock have declined materially, we still believe our fundamental investment case for Target stock will ultimately be realized, although not within the original timeframe we had initially estimated,” he wrote in the letter dated Feb. 5.

Ackman, 42, an activist investor, has pushed management of Minneapolis-based Target to place the land under its stores into a real estate investment trust that would lease the property back to the retailer. The company could then sell part of the REIT to the public, raising an estimated $5.1 billion. Target management has rejected the proposal.

Fund Restructured

At the end of January, Ackman restructured the fund’s portfolio using longer-dated options that expire in January 2011. If the share price rises to at least $65 in the next two years from its current level of about $33, the fund’s value could jump by four times, Ackman said. If the stock is below $35 in two years, investors will likely be wiped out.

Investors will be allowed to take money out of the Target fund if they notify New York-based Pershing Square Capital Management LP by Feb. 11, the letter said.

How much investors will get back depends on how many clients ask to leave, and whether the fund, which started in 2007 with $2 billion, attracts new investment.

“It’s going to be hard to defend his reputation when he’s down that much,” said Brad Balter, head of Boston-based Balter Capital Management LLC, who farms out money to hedge funds.

Ackman estimated in the letter that clients who want to exit could get back as little as 15 percent of their money. Ackman declined to comment.

Ackman’s main fund, Pershing Square International Ltd., declined 12 percent last year, losing money on consumer and retail stocks including Target and Borders Group Inc. and making money betting against bond insurers including MBIA Inc.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: February 6, 2009 13:11 EST