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For Ackman’s Pershing Square, Two Reasons to Celebrate

The manager’s long-suffering short bet against Herbalife got a big boost during the week his foundation celebrated a milestone.

  • Michelle Celarier

When hedge fund manager Bill Ackman entered the Park Avenue Armory on Monday night for a glittering ten-year-anniversary celebration of his Pershing Square Foundation, he had more than one reason to party. That morning his big and long-suffering Herbalife short had surged on news that the multilevel-marketing company’s sales were tanking.

Ackman’s short bet gained momentum after Herbalife admitted its sales were falling more than expected since new rules mandated by the Federal Trade Commission went into effect on May 25. The rules were part of a settlement with the FTC that required Herbalife to “start operating legitimately.” The stock’s subsequent decline marked a welcome shift for the famed activist investor, whose main hedge funds had fallen on hard times over the past two years.

Until Monday, Herbalife’s seemingly unstoppable rise had kept a lid on Ackman’s efforts to turn around the funds, which are up between 4 and 5.9 percent this year, depending on the fund. Since the lows reached with last year’s collapse in the share price of Valeant Pharmaceuticals International — a longtime Pershing Square holding until Ackman liquidated the position in March — the funds have gained about 20 percent from the bottom in March 2016. Still, Pershing Square’s investors are smarting from double-digit losses in 2015 and 2016, and Ackman has a long way to go to make investors whole, which he has vowed to do.

One major obstacle has been Herbalife, at least until this week. The company, which has lost a number of senior executives in recent weeks, said on Monday that volume points — a proxy for sales — could decline by as much as 8 percent this quarter, almost double what it had predicted just weeks earlier. That news sent the stock down more than 7 percent on Monday, to close at $68.88, and led to a handful of potential lawsuit announcements. The share price decline marked a sudden shift for a stock that had been on a tear since the company raised its guidance on May 4, and insiders including former CEO Michael Johnson began selling stock and options. As of Thursday, the stock was still down about 7 percent for the week.

“Fewer than three weeks after the stock sales, the company is now lowering guidance, somehow claiming that it is surprised by reduced volumes the first month the FTC settlement takes effect,” Pershing Square said in a statement. Other short sellers took notice: Herbalife short interest rose to $1.8 billion, according to S3 Research, which said it was up $635 million, or 55 percent, for the year and getting closer to its historical high of $2 billion set in July 2013.

While Ackman’s investors may still be feeling glum given the steep losses the funds have suffered, the more than 150 recipients of his foundation’s gifts have a different view, as they shared at Monday night’s gala. Famed cellist Yo-Yo Ma praised the foundation’s work following a performance of his Silk Road ensemble at the anniversary party, a view numerous other speakers echoed that evening. Ma’s relationship with Ackman stretches back to 2007 and includes Ackman’s financing of an HBO documentary on the Silk Road ensemble, The Music of Strangers, that explores the role of music in preserving cultural traditions and promoting understanding.

The group is only one recipient of the $400 million the foundation has granted, and was among several honored that night. Ackman, who is now estimated to be worth $1.4 billion, has given to such well-known and varied nonprofits as the Innocence Project, Human Rights Watch, Friends of the High Line, and TheDream.US, in addition to scores of more obscure causes. Ackman’s 2015 donation of $25 million to the Dream organization, which awards scholarships to undocumented immigrant youth, came as a result of his battle against Herbalife, which he believes has targeted undocumented Hispanics, and his promise to donate any profits from his short bet to charity. (So far, there have been no profits.)

In a Q&A with Ackman moderated by one of his former Harvard professors, Peter Tufano, the manager said he has had to pull back from his nonprofit board commitments in recent months. “I really have to focus on business,” he said — noting that if Pershing Square isn’t successful, the foundation won’t be either.