Depending on whom you ask, Herbalife Ltd. is either a pyramid scheme that preys on the poor or the innovative manufacturer of dietary supplements favored by a former secretary of state. Bill Ackman, a member of the first camp, admitted in an interview with Bloomberg TV to losing $400 million to $500 million since his Pershing Square Capital Management LP hedge fund started short selling Herbalife shares about a year ago. Ackman also said that this wasn't “just a trade” for him -- he promised to keep betting against the company “to the end of the earth,” a phrase reminiscent of Captain Ahab’s vow that he would chase the white whale “round perdition's flames before I give him up.”
According to Ackman, the Herbalife losses represent less than 5 percent of the total capital managed by his hedge fund. That’s significant, but not devastating. And he seems to have made an adjustment by limiting his potential losses. In the same interview in which he committed to bet against the company to the end of the earth, Ackman said that he had recently modified his bet to protect himself from short squeezes with the help of long-dated put options.
If Herbalife ever gets shut by regulators, Ackman would end up making far more than he lost -- and he wouldn’t have to worry about being forced to close out his position in the interim. In that case, he would have nailed both the fundamental analysis and the required trading strategy. If regulators never move against Herbalife, Ackman would continue to lose money, although at a more measured pace and with a limited downside. It's cases like this that show why it’s so hard to beat the markets.