Has Bill Ackman’s Billion-Dollar Bet on Herbalife Gone Bad?

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Source: http://www.flickr.com/photos/artonice/

Source: http://www.flickr.com/photos/artonice/

Apparently, it all started with a tip from a reporter-turned-financial analyst named Christine Richard. According to the New York Times, it was Richard who seeded activist hedge fund manager Bill Ackman with the idea that nutrient supply company Herbalife Ltd. (NYSE:HLF) is a pyramid scheme. And after ostensibly completing the kind of rigorous due diligence expected of a successful hedge fund manager, it was the seed planted by Richard that bloomed into a short thesis, and the short thesis into a $1 billion bet that Herbalife would be outed as fraudulent and that the stock would plummet as a result.

This isn’t the first big bet that Pershing Square Capital Management, the hedge fund Ackman founded and manages, has made on a company it believes is corrupt or fraudulent. Ackman is known to pursue his theses with a particular conviction, putting not just enormous effort but enormous capital behind his position. He famously made a big short bet on bond insurer MBIA in 2002, arguing that the company was built on an excessively risky foundation — and he was right. Pershing Square banked its investors about $1.1 billion when the company nearly collapsed during the financial crisis.

However, the Herbalife bet is a much more complicated situation. Ackman has lobbied intensively for about fourteen months now with little success. Shares are down about 3.5 percent over the past two years, suffering dramatic, periodic declines whenever it looks like Ackman may be approaching a checkmate but otherwise rising gradually as the company continues to grow despite the media firestorm. Herbalife reported record sales of $4.8 billion in 2013, and analysts are expecting about 10 percent top-line growth in 2014.

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