Hedge Funds Battling Over Herbalife? Run!

by Dan Burrows | January 10, 2013 1:44 pm

Hedge Funds Battling Over Herbalife? Run!

Two big-gun hedge funds are lobbing shells at one another over Herbalife (NYSE:HLF[1]), meaning the best thing for any little-guy retail investor to do is cower for cover.

Herbalife, a marketing network of overpriced weight-loss shakes and other supposedly nutritional products, went on the counterattack Thursday, trying to beat back claims that it’s a pyramid scheme.

If you’re new to the saga, here’s a quick recap: Right before Christmas, famed hedge fund manager Bill Ackman, who runs Pershing Square Capital Management, disclosed that he’s short 20 million shares of Herbalife — a position worth roughly a billion dollars — because, he says, it’s a scam.

It’s a pyramid scheme, Ackman contends, wholly dependent on new recruits to the network to keep the entire company from crumbling under its own weight.

Ackman is essentially betting that the Federal Trade Commission will run with his rather massive investigation[2] and shut Herbalife down. Therefore, the hedge fund macher has a price target on the stock of … zero.

Naturally, news that a hedge fund guy as cunning and successful as Ackman was short Herbalife clobbered the stock.

And, just as naturally, the stock bounced back when another famous, cunning and successful hedge fund titan took the other side of Ackman’s bet.

Dan Loeb, who runs Third Point, sent the stock up more than 4% after he disclosed a stake of more than 8% in Herbalife. His price target? Somewhere between $55 and $68 a share. Maybe more.

Here’s what Loeb wrote in a letter to investors:

“The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the company. We find this thesis to be preposterous.”

So, yeah, it’s been a wild ride for anyone caught in this stock. Just have a look at the last month of price action, courtesy of YCharts[3], below:

HLF chart Hedge Funds Battling Over Herbalife? Run![4]

And if the heavyweight bout of Ackman vs. Loeb weren’t interesting enough, there’s more.

The Securities & Exchange Commission has reportedly opened an investigation into Herbalife. Oh, and then there’s the report that Carl Icahn, the former corporate raider turned activist investor, has taken a long position in Herbalife, too.

Meanwhile, in the middle of all this mishegas, Herbalife CEO Michael Johnson had to hold a meeting with investors Thursday to defend the company as a legitimate multilevel marketing firm — not a complete and total ripoff.

Oy.

So why are you in this stock, again?

As InvestorPlace editor Jeff Reeves[5] writes: “Only keep riding HLF if you believe in the business, its 3.3% dividend and the prospect of more buybacks boosting shares.”

And if you have a hell of stomach for volatility.

After all, this is being billed as the bloodiest battle of hedge-fund titans of all time. And although it’s a certainty that someone is going to lose a lot of money in this thing, there’s absolutely no telling how and when it all ends.

So, please just remember this well-worn saying they have on the Street: Take care of the downside, and the upside will take care of itself.

Because if Ackman is Godzilla and Loeb is Mothra, that makes you Tokyo.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

Endnotes:
  1. HLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=HLF
  2. rather massive investigation: http://factsaboutherbalife.com/wp-content/uploads/2012/12/Who-wants-to-be-a-Millionaire.pdf
  3. YCharts: http://ycharts.com/
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/01/HLF-chart.jpg
  5. InvestorPlace editor Jeff Reeves: http://slant.investorplace.com/2013/01/has-herbalife-stock-found-equilibrium/

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