The ongoing battle between hedge fund titans Bill Ackman, Carl Icahn, and Daniel Loeb over Herbalife (NYSE:HLF) has developed into a solid of example of an old adage: for all the posturing and bravado that accompanies high-sake investing, timing is everything in financial markets.
Ackman’s position — he announced in December that his firm, Pershing Square Capital, went short on Herbalife for the tune of $1 billion — stands in direct opposition to that of Loeb and Icahn, both of whom have invested in the company that Ackman has famously called a pyramid scheme. Yet, for now, all three investors are in the black.
Loeb’s hedge-fund firm, Third Point, has made at least $50 million on its estimated $200-million stake, as a source familiar with the firm’s business told The Wall Street Journal. As Third Point has largely exited its Herbalife stake, Loeb has cashed out much more than the other two investors. For Ackman and Icahn, the gains have only been on paper, but profits have been made nonetheless. Icahn has generated approximately $25 million in unrealized gains on his $590 million investment, while Ackman has raked in more than $200 million in paper profits on his bet of more than $1 billion.
The estimate of Icahn’s profits was obtained by the Journal from a calculation based on the average price at which he purchased the shares, a figure derived from an analysis of regulatory filings. Despite the criticism heaped on Herbalife by Ackman since he took his short position in December and his belief that the company’s business is ultimately unsustainable, its stock price has remained above Icahn Enterprises’ (NASDAQ:IEP) average cost per share…
Ackman’s profit estimate was based on the average closing price of Herbalife’s stock during the time period in which he said he sold short — or borrowed shares with the intention of buying them back cheaper at a future date — 20 million shares.
However, any attempts for these investors to cash out and realize their gains could move the stock in a way that would erase their profits. For example, a large sell-off by Icahn would drive the stock price down and a move by Ackman to cover his short could push the price higher. This likelihood makes Ackman and Icahn’s paper gains less impressive. “It’s one thing to have a paper profit, it’s another thing to actually realize the profits,” Tim Ramey, an analyst at D.A. Davidson & Co. who covers Herbalife, told the publication.
For Ackman, who has been in money management for the past two decades, making his Herbalife bet a success is especially important, noted the Journal. While Pershing Square has earned average annual returns of more than 20 percent since the firm started in 2004 and it was up 5.1 percent this year through March 15, a win with Herbalife could appease investors concerned about his $800-million investment in J.C. Penney (NYSE:JCP). His losses on paper amount to approximately $500 million, according the publication’s source.
Comparatively, Third Point was up 8.3 percent through March 20.
Both Ackman’s bets on Herbalife and J.C. Penney are concerning investors, and so, currently, the hedge fund manager is attempting to raise billions in permanent investor money in order to have more control over his investments.