Bill Ackman knows how to put on a show, even if he doesn’t always know when to end it. On December 20 the 46-year-old founder of Pershing Square Capital Management took to the stage in an auditorium in Midtown Manhattan, just a few blocks from his hedge fund firm’s offices, to make his case against nutritional supplements company Herbalife. During the three-hour-plus, 334-slide presentation titled “Who Wants to be a Millionaire?” Ackman and two colleagues meticulously presented their thesis that Herbalife’s multilevel marketing structure is an illegal pyramid scheme designed to prey on the dreams of the distributors who sell its products. The vast majority of participants, they argued, leave the company “with increased debt, a sense of failure and damaged relationships.”
Ackman’s presentation was effective. By the end of the next day, Herbalife’s stock had fallen more than 25 percent, to about $27 a share good news for Pershing Square, which had put on an “enormous” short position in the company, said Ackman, who promised to donate all the profits from the investment to charity.
Every trade has two sides, of course, and another hedge fund showman, Third Point founder Dan Loeb, took advantage of the drop in Herbalife shares to buy up about 8 percent of the company’s common stock. In his year-end letter to investors, the 51-year-old billionaire took apart what he called Ackman’s “preposterous” thesis that the U.S. Federal Trade Commission “has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken to shut down the company.” Herbalife’s business, Loeb added, is “performing well,” with double-digit revenue and earnings growth, and very little leverage.
So which hedge fund manager will prevail? By mid-January the market seemed to be betting on Loeb, as Herbalife had rebounded to $46 a share.