Ackman Modifies Bet Against Herbalife

The activist investor William A. Ackman has pared down his $1 billion bet against the nutritional supplements company Herbalife, he told investors on Wednesday.

Mr. Ackman, who runs Pershing Square Capital Management, said he had restructured his bet on Herbalife, reducing more than 40 percent of the hedge fund’s short position against the stock in an attempt to stem Pershing Square’s paper losses on the investment, which have run into the hundreds of millions of dollars.

Part of the short position has been replaced with derivatives that give the firm the option to short Herbalife stock in the future, according to a letter to investors dated Oct. 2.

But Mr. Ackman has not folded his cards just yet. The theme in his last letter to investors in August was “mistakes” made by Pershing Square; this time it is“conviction.”

“Bottom line, we continue to have enormous conviction in our investment thesis,” he told his investors in the latest letter. He still contends that Herbalife is a pyramid scheme, an assertion Herbalife denies.

This conviction goes back to December 2012, when Mr. Ackman made a three-hour presentation at an Ira Sohn Conference Foundation gathering in Manhattan, outlining his reasons for believing the company was a pyramid scheme. During the presentation, he disclosed that he had an “enormous” short position in Herbalife’s stock.

While Herbalife shares tumbled in the days after Mr. Ackman’s presentation, they have since stormed back. The stock price is up 121.9 percent this year. Other hedge fund managers have taken positions against Mr. Ackman, the most notable being Carl C. Icahn.

In the third quarter alone, Herbalife’s share price rose to $70 from $45 a share, which has amplified the losses for Pershing Square.

But Mr. Ackman is still convinced that Herbalife is a pyramid scheme, and he referred to state, federal and international investigations into the company’s business practices.

“If the company fails within a reasonable time frame, we will make a similar amount of profit as if we had maintained the entire initial short position,” Mr. Ackman said.

He also touched on Pershing Square’s investment in J.C. Penney. Mr. Ackman sold the firm’s 18 percent stake suddenly in August after a failed public battle with directors that resulted in his resignation from the board. On Wednesday, Mr. Ackman told investors that Pershing Square lost around half of its original investment in J.C. Penney.

Since Mr. Ackman stepped down from the board, the struggling retailer has announced plans to raise as much as $932 million in fresh capital as it attempts a turnaround.

During his tenure on the board, Mr. Ackman brought in Ron Johnson as chief executive. Mr. Johnson’s effort to revamp the business failed, and he was forced to leave this year.

“Turnarounds are inherently risky and require a totally aligned board of directors, a C.E.O. with substantial turnaround experience and the support and confidence of all stakeholders,” Mr. Ackman told investors. “Without all of these ingredients, we are bearish on J.C. Penney’s prospects.”