Nearly 10 months ago, William Ackman stepped on a New York City stage and confidently proclaimed that Herbalife’s stock was headed to 0. He publicly scoffed at the diet shake seller while announcing that his Pershing Square hedge fund had shorted Herbalife’s shares to the tune of $1 billion because the company was a pyramid scheme.
Now, Ackman is retreating from his massive short trade against Herbalife—but he is not giving up. In a letter to investors in his Pershing Square hedge fund, Ackman disclosed that in recent weeks Pershing Square had covered more than 40% of his short position, at least 8 million shares, “in order to mitigate the risk of further mark-to-market losses on Herbalife.” Ackman, however, is not surrendering the
With Herbalife’s stock up more than 125% this year, Ackman’s massive Herbalife short trade has so far been brutal and he is partially covering his short after the stock has skyrocketed. The short trade has caused his fund some $500 million in losses and together with his disastrous
While Ackman is backing down a bit by booking big losses, he is still keeping a huge bet against Herbalife going. In his letter, Ackman said that his bet against Herbalife still constitutes 12% of the capital of his fund, down from 16%. As he noted, the exposure of his hedge fund to the put options is limited to whatever premiums he is paying for them. He also claims that reducing the number of shares he has sold short will protect his Pershing Square hedge fund from a further potential short squeeze. Investors have been piling into Herbalife’s stock in recent weeks on the notion that the company might conduct a large and leveraged share repurchase once the company gets clean financial statements from its new auditor. Ackman has consistently argued that it will be very hard for Herbalife to pull off such a share repurchase in a timely manner, but his actions suggest he needs to protect himself from such a possibility.
“At yesterday’s closing price of $72.84, we believe the potential reward from being short Herbalife is extremely attractive relative to the risk of loss,” Ackman wrote to his investors. “In my career, I have not seen a less attractive risk reward ratio than a long investment in Herbalife at current levels.”
Nevertheless, Ackman’s move is somewhat of a capitulation from the grandiose stand he took on that New York stage last December. At the very least, it is an admission of tactical failure in executing his bearish thesis against Herbalife via a loud short promotion that helped him book gains and generate rich performance fees in 2012, but dragged down his fund in a big way so far in 2013.
“I have learned that the key to long-term investing is to balance confidence with the humility to recognize when the facts are no longer consistent with one’s original investment thesis,” Ackman told his investors, referring to his exit from JC Penney, but also seemingly trying to reassure them about his Herablife crusade. “It is critically important not to let psychological factors interfere with economic rationality in investment decision making.”
