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Bill Ackman Reduces Herbalife Short by 40%, Replaces It With Long-Term Put Options

Herbalife, Bill Ackman: The manager of the New-York-based hedge fund, Pershing Square, Bill Ackman, recently announced it was reducing its short position in Herbalife Ltd. (NYSE:HLF)  by some 40%, and replacing them with long-term “put options.” The move comes amid getting a paper loss worth $500 million on a $1 billion short bet against the company, and is meant to reduce the risks from further losses, according to the Pershing Square 2013 Q3 Investor Letter.

Bill Ackman in front of Perishi

While making the $1 billion bet against Herbalife, Ackman claimed that the company represents a pyramid scheme, which could mean that sooner or later it might get shut down by the regulators. However, the stock of the company has experienced solid growth and is up over 120% since the beginning of the year.

“If the company fails within a reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position—while mitigating the risk of further substantial mark-to-market losses because our exposure on the put options is limited to the total premium paid,” Ackman said in the letter.

“While we have endured mark-to-market losses on this investment as Herbalife bulls have promoted the stock and downplayed the probability of government intervention, we believe it is only a matter of time before the company is shut down and prosecuted by regulators,” the manager of Pershing Square also said.

Among the aforementioned “bulls” that hold significant long positions in Herbalife we can mention Icahn Capital Lp, managed by Carl Icahn, which holds almost 17 million shares of the company, valued at some $765.9 million. Other “hedgies” have some smaller positions, like George Soros’s Soros Fund Management, which owns around 5 million shares, or Steven Richman’s East Side Capital (Rr Partners) with a stake of over 3 million shares.

Recommended Reading:

Why Bill Ackman Could Boost This Stock By 35%

Is There Any Value in Bill Ackman’s Holdings?

Herbalife Ltd. (HLF) Highlights: Buyback Talks, Jim Chanos, Options Trading & More

Disclosure: none

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