December 17, 2017

Hedge Fund Titans Bill Ackman vs. Daniel Loeb, Round 2

Ingemar Johansson and Floyd Pattersson 1959

Two hedge fund managers have taken active positions on the opposite side of a trade. Pictured is Ingemar Johansson and Floyd Pattersson 1959.

Call it Hedge Fund Titans Bill Ackman vs. Daniel Loeb, Round 2. The two managers are squaring off publicly over a stock, Herbalife (HLF). Juliet Chung at The Wall Street Journal explains the feud.

Mr. Loeb’s hedge fund disclosed Wednesday it owns an 8.2% stake now valued at $350 million in nutrition-supplements company Herbalife Ltd. HLF -1.78%Mr. Ackman’s Pershing Square Capital Management LP has bet more than $1 billion against the company by shorting its stock.

“This is shaping up to be potentially the bloodiest hedge-fund battle of all time,” said Robert Chapman Jr., an activist investor who has also accumulated shares in Herbalife since Mr. Ackman laid out his bearish case against the company last month when he said Herbalife was a pyramid scheme.

Herbalife has called Mr. Ackman’s presentation on the company a “malicious attack on our business model based largely on outdated, distorted and inaccurate information…We are not an illegal pyramid scheme,” the company said.

This isn’t the first time Messrs. Ackman and Loeb have squared off. Mr. Loeb had taken a short position in J.C. Penney, JCP +1.86%a retailer that Mr. Ackman has sought to revive under former Apple Inc. AAPL +1.24%executive Ron Johnson, according to people familiar with Mr. Loeb’s holdings. Penney’s new strategy hasn’t paid off so far, with both sales and the share price slumping. Mr. Ackman has told his investors the turnaround will take time. The company has repeatedly said it would take years to turn around the chain.

Herbalife sells protein shakes, energy drinks, vitamins and a bath and body-care line through independent distributors in 88 countries. Those distributors earn money on sales to consumers and from other distributors they sponsor and bring into the business, a system known as multilevel marketing. It reported a $117.8 million profit on sales of $1 billion in the third quarter.

Mr. Ackman has said he has sold short more than 20 million shares of Herbalife at a cost of more than $1 billion, which means he has 9% of his firm’s assets under management tied up on his bet.

When investors short a stock, they borrow shares to sell them, and profit when they can buy the stock back later at a lower price. But if a stock rallies, short-sellers can rack up losses in a hurry.

“For every investment, we think about risk and reward,” Mr. Ackman said Tuesday, “and we think the reward here is much greater than the risk.”

Mr. Loeb has 3% of his firm’s $10.1 billion in investor money tied up in Herbalife. Herbalife shares surged above $41 Wednesday on news of Mr. Loeb’s investment before sinking below $38 in late trading after The Wall Street Journal reported the SEC’s inquiry into the company. It closed at $39.95 a share.

Investors’ roller-coaster ride began last May, when another hedge-fund manager, David Einhorn of Greenlight Capital Inc., dialed into an earnings conference call to ask Herbalife executives about the company’s business model.

The shares tumbled following the call by Mr. Einhorn, who hasn’t disclosed if he has taken any position in Herbalife shares.

Third Point largely acquired its stake following Mr. Ackman’s presentation, the firm wrote in the investor letter, which didn’t identify Mr. Ackman by name. Mr. Loeb began looking at Herbalife when it was in the news and trading below its historic prices, a personal familiar with him said, and flew from a vacation in Mexico to meet with Herbalife management as he was still assembling his position.

Other investors that own Herbalife shares include Kerrisdale Capital Management and Bronte Capital, two small hedge funds that are best known for shorting companies. Sahm Adrangi, founder of the New York-based Kerrisdale, which manages about $130 million, said Wednesday he remained confident in his position despite the SEC inquiry into Herbalife.

Mr. Ackman says he got the idea to short Herbalife from Christine Richard, a friend and former reporter who now works as an analyst.

Ms. Richard and her business partner, Diane Schulman, wrote a research report in February arguing that Herbalife was a pyramid scheme.

The report claims that Herbalife’s high-level distributors only buy the company’s products to earn more commissions, and not actually sell them to consumers.

The report also claims Herbalife has phony retail sales numbers. Herbalife has denied all these accusations.

Some stock writers have suggested steering clear of the stock while these large investors battle it out. After all, with an investigation underway, one of the managers is going to lose big at the other side. Or the price will stay relatively the same. For now Hedge Fund Titans Bill Ackman vs. Daniel Loeb, Round 2 is underway. It should make for one of the biggest public face-offs between managers.

Comments

  1. Thanks for finally writing about >Hedge Fund Titans Bill Ackman
    vs. Daniel Loeb, Round 2 <Liked it!

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