The Greatest Hedge Fund Brawl In Ages Is Happening Right Now — Here's What You Need To Know

Business Insider

Everyone has been talking about the hedge fund war over Herbalife — a multi-level marketing firm that sells weight loss and nutrition products.

One one side we have hedge fund titan Bill Ackman, the founder of Pershing Square Capital Management, who is shorting the stock.

After Ackman publicly declared his short, hedge fund heavyweight Daniel Loeb, the founder of Third Point LLC, took out a 8.24% stake in the company on the long side.  Some other fund managers have also gone long Herbalife after disagreeing with Ackman's short case.

Ackman's rival Carl Icahn hasn't publicly said if he's long Herbalife or not, but he slammed him on Bloomberg TV for his  "holier than thou" short calling him "disingenuous."

It's definitely been a real-life clash of the titans.

The most important thing you have to realize is that Herbalife itself is just the "McGuffin" in this story. It's a plot device that moves the story along, but in itself means very little. A classic McGuffin was the unidentified glowing item in the briefcase in Pulp Fiction, which Marcellus Wallace was so eager to have returned to him. What was it? Nobody knew or cared. But a fabulous story hinged on it.

So, if you're just coming into this story, we've put together a comprehensive guide of everything you need to know about the Herbalife hedge fund war: 

  • On December 19, 2012, CNBC's Kate Kelly first reported that hedge fund titan Bill Ackman, who runs Pershing Square Capital Management, has been shorting Herbalife because he considers the company to be pyramid scheme. 
  • People knew for sometime that Ackman was short a company, but it wasn't clear which one. Ackman, who is known for being a long-only investor, had told investors in Pershing's Q1 letter in June that he had new short position.  Then, in October, during a CNBC appearance on "Squawk Box" he wouldn't reveal his short, but said the country would be better off when it goes out of business.
  • After CNBC reported Ackman's short, the stock began to tank.  That day,  shares of Herbalife fell $5.16 yesterday, or  12.14 %, to close at $ 37.34  a share. 
  • Herbalife's CEO Michael Johnson told CNBC in a telephone interview that Ackman's "pyramid scheme" claim is a "bogus accusation" and that it's "blatant market manipulation." 
  • The next day on December 20, 2012, Pershing Square gave an extremely in-depth three-hour long, 342-slide presentation at a special Sohn Conference event in Midtown Manhattan.  Ackman explained that he thinks Herbalife is a pyramid scheme.  He has a price target of zero and has pledged to donate any personal profits to charity.  He also refuted Herbalife's claim of market manipulation saying they didn't own options. 
  • Herbalife responded to Ackman's presentation later that day calling it a "malicious attack" and accused him of using "outdated" and "inaccurate information."  The company also stated in a release that it is "not an illegal pyramid scheme." The company said that it would hold an analyst/investor day to rebut Ackman's claims. 
  • Ackman's attack on Herbalife didn't stop with his presentation.  He unveiled FactsAboutHerbalife.com.  The website features documents, promotional material from the company, videos and depositions.  He also took out some Google Ads when people search terms related to "Herbalife." 
  • On January 9, Daniel Loeb, the founder of Third Point LLC, filed a 13D with the Securities and Exchange Commission that his hedge fund had taken a 8.24% stake (8.9 million shares) in Herbalife.  In a letter to investors, Loeb said Ackman's pyramid scheme claim had "no merit" and called his short "preposterous." The New York Post later estimated that Loeb bought Herbalife at $32 a share
  • Other fund managers such as Robert Chapman of Chapman Capital and John Hempton of Bronte Capital disagree with Ackman's short case, too.  Hempton even published a blog post lambasting Ackman saying that he screwed up his short because he has a "misplaced silver spoon" and can't talk to poor people.
  • There was also speculation that David Einhorn of Greenlight Capital might be short.  Back in May, Einhorn raised some questions during an HLF conference call and the stock dived.  The  Wall Street Journal's Juliet Chung reported  that Einhorn shorted Herbalife last year and it was  profitable for Greenlight.  Einhorn does not currently have a bet on the  multi-level marketing firm that sells nutrition products.  It's also unclear how big his short was and what the profits were, the report said. 
  • The world's greatest short seller Jim Chanos weighed in on the hedge fund war between Ackman and Loeb in a Reuters TV interview.  He said he thinks it will come down to who can prove it's a good business proposition or not.  Chanos, who said he's looked at the MLM industry, wouldn't say if he's short Herbalife. 
  • On January 10, Herbalife hosted its analyst/investor day in Midtown Manhattan. The company gave a 102-slide presentation that aimed to debunk the points that Ackman made about their distribution, retail sales and accounting methods, among other things.  Herbalife also claimed that Ackman was "misleading" and used "misinformation."
  • Then, Ackman fought back.  He said "the company distorted, mischaracterized, and outright ignored large portions" of Pershing Square's mammoth presentation. He said Pershing Square would publicly release a series of questions and have another presentation. 
  • On January 14, shares of Herbalife rallied back above the pre-Ackman short levels.  They're currently up about 1.7% since December 18, the trading session before Ackman confirmed his short.  On December 24, the stock hit a 52-week low of $24.24 a share. 
  • The most recent news is that Ackman's rival Carl Icahn, who hasn't publicly said if he's long Herbalife or not, slammed him on  Bloomberg TV for his "holier than thou" short calling him "disingenuous."  Ackman fired back in a press release saying Icahn is a good investor, but doesn't keep his word.

We'll keep following this story as it develops. 

SEE ALSO: The contract that started a huge feud between Bill Ackman and Carl Icahn >



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