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Ackman Herbalife Win Clouded by Fannie-Freddie Declines

Herbalife Products
Independent distributors browse available products before placing orders at the Herbalife Ltd. Los Angeles distribution center in Carson, California. Photographer: Patrick T. Fallon/Bloomberg

Bill Ackman can’t catch a break.

Yesterday, the activist investor got his wish that the Federal Trade Commission would start investigating Herbalife Ltd., more than a year after he accused the nutrition company of being a pyramid scheme. The victory, which sent the stock tumbling by the most since January, was marred by a 39 percent decline in Fannie Mae and Freddie Mac shares over the past two days after Senators proposed dismantling the companies, punishing one of his most profitable holdings.

The divergent fortunes of the investments by Ackman’s $11.9 billion hedge-fund firm Pershing Square Capital Management LP highlight the risks and rewards of his strategy of taking concentrated bets -- especially ones like Herbalife and the mortgage guarantors that may require the influence of lawmakers and regulators to succeed.

“Both his investments are responding to two different governmental issues and those are very difficult to predict,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors.

The decline in Fannie Mae and Freddie Mac translates into a $400 million paper loss on the mortgage insurers since March 10, though they remain among Ackman’s most profitable holdings, with a $220 million gain since he put on the trade. The Herbalife short, the biggest loser for Pershing Square since the New York-based firm’s 2004 inception, remains unprofitable even after the FTC decision.

Ackman, 47, declined to comment on his investments and the FTC probe.

Herbalife Denies

Pershing Square has been betting against Herbalife since 2012, when he made a $1 billion wager against the nutritional-supplements company. He has been working to persuade regulators to shut the company down, saying it misleads distributors, misrepresents sales figures and sells a commodity product at inflated prices.

Herbalife has repeatedly denied Ackman’s allegations while winning over allies including billionaire Carl Icahn and Post Holdings Inc. Chairman William Stiritz. Last month, in a presentation to investors, Ackman said the investment had declined 49 percent. He pared losses yesterday as the shares fell 7.4 percent to $60.57 on news of the FTC investigation. He first started selling shares of Herbalife short on May 1, 2012, when they were trading at $56.30.

While Ackman waged his campaign against Herbalife, he also snapped up 10 percent of the outstanding shares of Fannie Mae and Freddie Mac.

Senate Plan

He bought the Fannie Mae shares for an average cost of $2.29 in October and November last year and spent an average of $2.14 for Freddie Mac, according to regulatory filings. The common stock had gained more than 90 percent this year through March 10, when his holdings had a combined value of about $1 billion.

Both stocks rose about 9 percent on the morning of March 11. Then they plunged after the leaders of the Senate Banking Committee said they planned to introduce legislation that would replace the U.S.-controlled mortgage companies with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent. Fannie Mae shares closed yesterday at $3.54 and Freddie Mac stock traded at $3.36.

Pershing Square has returned an annualized 19 percent between Jan. 1, 2004 and the end of 2013, according to the client presentation. The largest fund rose 12 percent this year through Feb. 28, according to a person briefed on the returns who asked not to be identified because the information is private.

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