(Updates with additional background and details, including more information from Pershing's letter.)

Pershing Square Capital Management LP funds' outperformed the major market indexes in the first quarter, according to founder and chief executive William Ackman's letter to investors.

The hedge fund has received heightened press attention, especially after its proxy contest with Target Corp (TGT). Pershing said it would continue to seek passive and active investment opportunities but that it preferred to generate profits with less activity.

For the first quarter, Pershing reported the funds saw gross returns between 2.5% and 4.1%, while growth net of all fees was 2.1% to 3.8%.

Major indexes posted losses of 2.8% to 12.4%, including dividend reinvestment, for the first three months of the year. The smallest loss was in the Nasdaq Composite Index, while the largest loss was seen at Dow Jones Industrial Average.

In the group's letter to investors dated Monday, Pershing said that while it lost its proxy battle with Target last month, it "achieved many of the objectives" identified before the battle, including catalyzing Target to exit the credit and funding risk associated with its credit-card operations and improving the company's governance. Pershing believes new Securities and Exchange Commission-mandated rules will reduce the cost of a proxy contest and said if the changes were approved, it would put Pershing and others in a position to more easily "replace directors at Target or other companies."

Still, Pershing expects to "fade into the sunset as far as the media is concerned," until an investment opportunity requires the fund to work more publicly in the future. Recently, Pershing initiated two new long-term investments in unnamed large-capitalization U.S.-based businesses, with the expectation that it will remain a passive investor.

Since the beginning of the year, Pershing exited its investments with Wendy's/Arby's Group Inc. (WEN), Visa Inc. (V) and Dr. Pepper Snapple Group Inc. (DPS), driven primarily by valuations and the lure of more attractive investments.

The hedge fund said it substantially reduced the size of its credit-default-swap portfolio. Pershing reduced the hedge as some of the global financial crisis risk abated, while the firm liquidated its equity exposure and identified more efficient ways to hedge its exposures.

Still, Pershing holds substantial single-name CDS positions in holding-company debts of financial institutions, which the fund believes will likely need large amounts of additional equity capital. It sees those positions as having low carrying costs with potential for large profits.

Ackman also touted the changes and investments made to management at Borders Group Inc. (BGP) and bankrupt General Growth Properties. Inc. (GGWPQ). Ackman was appointed to General Growth's board on Friday, the first board he has joined since the formation of Pershing.

Ackman, who is on a business trip abroad, wasn't immediately available to make additional comments on the letter.

-By John Kell, Dow Jones Newswires; 201-938-5285; john.kell@dowjones.com