UPDATE 2-Ackman's fund sitting on growing losses on Herbalife bet

Tue Jul 30, 2013 3:56pm EDT
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By Svea Herbst-Bayliss and Katya Wachtel

BOSTON/NEW YORK, July 30 (Reuters) - Herbalife's surging stock price may be causing hedge fund manager William Ackman gastrointestinal pain now that he is nursing $300 million in losses due to his billion dollar bet that the nutrition and supplement maker's shares would fall.

Shares of Herbalife are trading up 30 percent from where Ackman's $12 billion Pershing Square Capital Management first began shorting them last year, after he labeled the company a pyramid scheme. Ackman has said he expects the stock to drop so far that it would eventually hit zero.

The short bet, made public in a widely covered presentation on December 20, 2012, drove the share price down 18 percent, to $34.24. But since then, it's been a bumpy ride for the manager and his investors, with Herbalife soaring 35 percent in the last month alone, to $61.08. That is well above the $50 a share where Ackman began shorting the stock last year.

The recovery in Herbalife's stock price - which has surged 85 percent this year alone - is weighing on Pershing Square's performance, leaving the fund with a modest 8 percent gain for the year and raising questions about just how long Ackman can afford to stick with his bearish bet.

One thing working in Ackman's favor and cushioning the impact of the loss is that several other stocks in Pershing Square's portfolio have performed well, especially Procter & Gamble, Howard Hughes and Canadian Pacific .

Ackman, 47, has called his short bet against Herbalife the biggest bearish bet of his career and said the roughly 20 million Herbalife shares he has shorted were bought with cash.

To short a stock, a trader usually borrows shares from a broker, putting down collateral, and then hopes the stock falls in price, at which point the trader can buy the shares in the open market, and use them to repay the loan - pocketing the difference as profit.   Continued...