Ackman's Pershing Square cuts Herbalife stock short position

By Svea Herbst-Bayliss

BOSTON, Oct 3 (Reuters) - Hedge fund manager William Ackman said he has restructured some of his $1 billion short bet against nutrition and supplements company Herbalife to guard against further losses but he said he still believes the company eventually will be shut down.

The activist investor raised eyebrows nearly a year ago when he said he was betting against the company, calling it a pyramid scheme that engages in unlawful and deceptive marketing practices and predicting its share price would fall to zero.

Ackman's $11 billion Pershing Square Capital Management has lost roughly $500 million on the bet this year as the company's stock price has raced up 106 percent since January.

On Thursday it was off nearly 5 percent, trading at $68.25 in later afternoon.

"In recent weeks we have restructured the position by reducing our short equity position by more than 40 percent and replacing it with long-term derivatives, principally over-the-counter put options," Ackman wrote in a quarterly letter sent to investors and seen by Reuters.

But the 47-year old manager said he remains convinced that his investment thesis on Herbalife is still correct and it is "only a matter of time before the Company is shut down and prosecuted by regulators."

Herbalife has said it operates a legal multilevel marketing business and is not running a pyramid scheme.

In the letter, Ackman said the stock price has climbed because many investors believe the government will do nothing and that Herbalife will keep earning a lot of money and buying back its shares, forcing short sellers like his fund to cover their positions.

A bullish report from industry analysts forecasting that the company would launch a bond issue and use the proceeds to buy back stock at $75 per share further fueled the stock's gain, Ackman wrote.

By cutting the size of its short position as a percentage of the share float, the fund cuts the risk of a short-squeeze by other investors trying to force Pershing Square to cover its position, the letter said.

Overall, 2013 has been difficult for the fund, which is up only 0.5 percent in the first nine months, investors familiar with Pershing Square's returns said. During the third quarter the fund lost 5.4 percent. The average hedge fund has gained about 4 percent his year while the Standard & Poor's 500 index is up 19 percent.

One thing that surely helped Ackman at the tail end of the third quarter was that he had sold his 18 percent stake in JC Penney before the stock tumbled further.

Despite this year's difficulties, Ackman remains popular with pension funds and other big investors who admire the roughly 20 percent average annual return he has delivered since setting up Pershing Square nearly a decade ago.

"Our willingness to change our mind and exit at a substantial loss on a high-profile investment should give you comfort that we will make rational investment decisions without regard to emotional, personal or other considerations," Ackman wrote in the letter.