It's good to be a rock star investor these days, particularly if you are betting against a company.
Celebrity investors like William A. Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital can move a stock by the billions of dollars simply by disclosing their bet. It's something ordinary investors can't do, which gives these star investors a tremendous advantage. But it also makes the truth about a company harder to discern.
Take the case of Herbalife. About two weeks ago, Mr. Ackman gave an impressively lengthy, 343-slide presentation on Herbalife at an event sponsored by the Sohn Conference Foundation in Manhattan.
Herbalife sells nutritional supplements through its own network of recruited sales representatives (think of Avon or Amway). Mr. Ackman's fundamental thesis is that Herbalife is a pyramid scheme. He asserts that the company relies primarily on pushing products to its recruited sales staff for its profits, rather than sales to retail customers and outlets.
Herbalife has heatedly criticized Mr. Ackman's assessment. After his conference appearance, the company said in a brief statement that Mr. Ackman's presentation was “a malicious attack on Herbalife's business model based largely on outdated, distorted and inaccurate information.†The company has scheduled an analyst day for Jan. 10 to try to rebut Mr. Ackman's arguments.
The presentation appeared to set off panic among Herbalife shareholders, and the stock tumbled 38 percent that week. The presentation and the stock's decline were widely covered in the financial media. Mr. Ackman's presentation was posted to Henry Blodget's Business Insider Web site, where it has been downloaded more than 2.8 million times.
As for Mr. Ackman, he is not required by securities laws to disclose his position in shorting, or betting against, a company's stock. But based on his own disclosure in the media, it appears he has shorted well over $1 billion in Herbalife stock and is already up hundreds of millions of dollars on his bet. (In the spirit of the Sohn Conference Foundation, which supports the treatment and cure of pediatric cancer and other childhood diseases, Mr. Ackman has promised to donate his personal profits to charity.)
There is a culture of worship around Mr. Ackman and a small circle of hedge fund deities like Mr. Einhorn, John A. Paulson of Paulson & Company and even Steven A. Cohen at a somewhat tarnished SAC Capital Advisors. When one of them says or does something, it quickly reverberates in the market.
We have seen this before with Warren E. Buffett, when a new investment by him pushes the stock of the company up instantly. But more often these days, it is the bets of hedge fund managers that a stock will go down that move share prices.
You can tick off the list: Mr. Einhorn and St. Joe Company; Steve Eisman and the profit-making education sector; Carson Block of the investment firm Muddy W aters Research and Olam International.
These managers are able to make their mere presence - and the whiff of a short position - move stocks down. If you need evidence, Mr. Einhorn asked just a few questions on a conference call with Herbalife's management in May and the stock immediately plunged.
Of course, these stocks may be falling because these investors are right. Muddy Waters, for example, made its name by exposing what regulators have since said was outright fraud at the Sino-Forest Corporation, a Chinese company. And shorting is an important part of the market, helping ensure that stocks are priced correctly.
There can also be a more sinister dynamic at work. Wall Street loathes uncertainty. So when investment celebrities disclose their bets against companies, particularly in very public places like a Sohn Foundation event, they create momentum, pushing investors to make decisions based not on the information but on fear.
In the wake of Mr. Ackman's presentation, an analyst with B. Riley & Company stopped coverage of Herbalife for the reason that trading was now no longer based on fundamentals but the pressure from short-sellers. And if you were a mutual fund manager right now, you would probably much rather be seen as not owning Herbalife; after all, why take the risk when you can just invest in other stocks to try to beat the market to earn your bonus?
Mr. Ackman's accusations may very well justify the sell-off, but that remains to be seen. (Herbalife's stock has been rising of late, although it is still below where it was before M r. Ackman intervened.)
But in these celebrity short bets, the truth often seems beside the point to the market. The question of what the facts are gets overtaken by the spectacle of a titanic struggle between company and hedge fund operator. John Hempton of Bronte Capital, who owns Herbalife stock, calls this “hedge-fund porn†and has characterized the struggle over Herbalife as “the hedge-fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow.â€
Yet the battle over Herbalife is not really Stalingrad. Rather, it is more like the United States invading Grenada.
Mr. Ackman, a brilliant investor by any measure, is already up a couple of hundred million dollars, and because securities regulations do not require him to disclose his position, he may already have taken money off the table. In all probability, he is at least adjusting his position. So he is likely to break even at worst. And even if he loses, he survived a big loss in Target and made billions in other investments. It's just another day at the office.
But Herbalife is mired in a public relations drama when it just wants to get back to normal. It is doing the customary things in a war against a short-seller: trying to depict the investor as misguided while correcting the facts - or putting its own spin on them.
Herbalife has also accelerated a stock buyback, almost Step 1 in any such campaign, and it has hired the investment bank Moelis & Company to represent it. In the end, though, Herbalife will be lucky if it gets back to where it was before Mr. Ackman's presentation, and it will be a struggle to do so.
Herbalife, to be sure, has been in the cross hairs of short-sellers for a while. It would be nice if instead of a panicked reac tion when a celebrity investor steps in, Wall Street kept its head and coldly assessed the facts. It certainly had the time to do so.
It is hard to stop shareholders from acting out of fear, but perhaps it is time for the Securities and Exchange Commission to require short-sellers with significant positions to disclose them as they are required to do for long positions, or those bets that a company's stock will go up. It would help for the market to at least know what the positions are when large short bets are announced, which might help limit panicked reactions.
To be fair, in response to S.E.C. regulatory proposals on the issue, Pershing Square has supported a requirement for additional disclosure on short-sale positions.
At Herbalife's conference next week, and in the days to come, there will be more information and no doubt more spin. Investors may even give Herbalife the thoughtful and rational scrutiny it deserves. But I doubt it.
