Bill Ackman's Herbalife Short Bet Gets 30 Percent Better

At the end of a nearly one hour conference call with investors in late October, Michael Johnson, the chief executive of Herbalife, reflected about his year-long battle with billionaire hedge fund manager William Ackman. 'So everybody I just want to say, 'thank you to everybody on the team Herbalife family,'' Johnson said. 'Despite this public market distraction, somebody gave me a quote this week and said it's useless to attempt to reason a man out of a thing he was never reasoned into and that seems to sum up this temporary distraction.'

But Ackman's campaign against Herbalife, which he calls a pyramid scheme, has not faded away. Instead, Ackman has reclaimed the momentum in the war over the diet shake seller. Shares of Herbalife fell by 7.8% on Monday and have now plunged by 32% in 2014. Ackman's big short position against Herbalife has helped fuel his Pershing Square's returns this year. That is pretty much the opposite of how 2013 went for Ackman, when the returns of his hedge fund were drastically hurt by the nearly 140% increase in Herbalife's stock.

With notable investors like Carl Icahn, William Stiritz and George Soros, taking big stakes in Herbalife last year, Ackman seemed like he was on the ropes. In November, Ackman said he would go to 'the end of the Earth' to defeat Herbalife, but no matter what he did, Herbalife's stock kept hitting new highs. Just a few weeks ago, the hedge fund's $1 billion bet against Herbalife was the worst investment Pershing Square had ever made.

Now things are starting to go Ackman's way. Still, it's unclear how close Ackman is to approaching the break-even point of his Herbalife investment. Ackman recently told his investors that he first started betting against Herbalife on May 1, 2012, when the stock plunged to $56.30 after hedge fund manager David Einhorn asked Herbalife's management tough questions on a conference call. On the surface, however, it seems like much of Ackman's short trade was put on at a lower level of between $45 and $50. In addition, the company has been paying 30 cents per share in dividends each quarter. With the threat of a short squeeze looming, Ackman also announced last fall that he had restructured his Herbalife short promotion, covering more than 40% of his short position, some 8 million shares, 'in order to mitigate the risk of further mark-to-market losses on Herbalife.' Instead, Ackman has purchased put options and other derivatives that he has described as 'long term' in nature. Shares of Herbalife closed at $53.50 on Monday. One thing is certain: the Herbalife short bet is seriously helping Ackman's hedge fund returns in 2014.

Ackman's Herblife short was given a boost in recent days after Herbalife disclosed that it had received a civil investigative demand from the Federal Trade Commission. The stock has also fallen this year over concerns about the company's operations in China, where regulators have opened an investigation of Nu Skin Enterprises, another publicly-traded multi-level marketing company. In addition, George Soros trimmed his holdings in Herbalife before the end of 2013.

Icahn, who is Herbalife's biggest shareholder, appears to be focusing more on Herbalife again. Herbalife recently said it would delay its April shareholder meeting by five days to give it more time to talk things over with Icahn. The battle over Herbalife is far from over.

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