Bill Ackman Says This Eccentric Short Seller Is 'Certifiably Crazy'by , , and
Former tax official Hempton now runs Bronte Capital in Sydney
Bronte has made profitable bets on Herbalife, Valeant
On Fridays, John Hempton decamps to the solitude of his Sydney beach house, where the locals know nothing of his quirky stock research and focus on sniffing out fraud.
The tax official turned hedge fund head, who built an online following by scouring numbers that don’t add up, has also posed as part of a gay couple trying to buy a home beyond their means to build a case for short-selling Australian banks. You’ll find him in Bangkok, talking to prostitutes about the hair dye they use. Or squaring off against billionaire investor Bill Ackman, who says Hempton is nuts.
The self-described eccentric has got some big calls right. His Bronte Capital Management Pty has bet profitably against Valeant Pharmaceuticals International Inc. and made money on a stake in Herbalife Ltd., both of which pit him against Ackman. It still holds the positions. While Hempton is known mostly for short-selling, he says he makes his real profits from long-term stock picking.
“We’re far longer than we’re short, and over time I expect to make more money on the longs," Hempton, 49, said in an interview before going for a body surf. “But our shorts are really quite unusual, and they are a lot of fun.”
Hempton’s path to becoming Ackman’s tormentor was unusual. He worked at the Australian Treasury for much of the 1990s, dissecting accounts to investigate tax avoidance.
A chance encounter with a headhunter on a Sydney ferry in 1999 got him in the door at Platinum Asset Management Ltd. By the time the firm started by billionaire Kerr Neilson went public in 2007, Hempton was a junior partner.
Retired at 39, Hempton says he co-founded Bronte in 2009 when his wife threatened to divorce him if he didn’t get out of the house. The four-person firm manages more than A$100 million ($75 million) from an office near Bondi beach.
Bronte came to prominence for bearish bets on Chinese companies that had listed in North America. They included Sino-Forest Corp., a tree plantation firm that filed for bankruptcy protection in Canada in 2012 after short-seller Carson Block said the company overstated its assets. And Longtop Financial Technologies Ltd., a software company that was delisted from the New York Stock Exchange in 2011.
Sometimes, Hempton’s research takes a comic tone, both for long and short investments. Once, he went to a Bangkok hair salon to investigate how well Henkel AG had done its marketing for its Schwarzkopf brand of hair dye, and ended up discussing the products with women who he says were call girls getting ready for the evening. The experience helped convince him he was right to own Henkel’s shares.
Hempton also posed with researcher and author Jonathan Tepper as graphic designers looking to borrow 10 times their combined income to buy property in Sydney’s suburbs. The ease with which they could do this signaled to him that Australia had a housing bubble and that it made sense to bet against the country’s lenders.
Hempton is “certifiably crazy,” Ackman wrote last year in an e-mail released by U.S. lawmakers as part of a Valeant hearing, discussing whether Bronte was shorting the drugmaker because he was an investor. Fran McGill, a spokesman for Ackman’s Pershing Square Capital Management, declined to comment.
“I have learned that you have to fact-check everything,” Hempton said of Ackman’s presentations about companies. “If all the facts line up you should probably put the same trade on. And if all the facts don’t line up, you should probably take the other side.”
Hempton says he started shorting Valeant when it rose to $130 a share. That happened in January 2014, and Hempton first wrote about it on his blog in June of that year. Ackman’s Pershing first teamed up with Valeant on an unsuccessful bid for Allergan Inc. in April 2014. The drugmaker’s stock ended last week at $23.25, after months of turmoil including U.S. federal investigations, an accounting scandal and scrutiny over drug-price increases.
Hempton finds such targets, he says, by tracking people close to past cases of corporate malfeasance. Then, he reads filings and talks with all kinds of people, including customers and suppliers, but very rarely management. He publishes theories on his blog to get reaction, testing his short case. Often, Hempton says, he’ll know a company is hiding the truth, but he won’t know what the truth is.
For Valeant, Hempton says the first red flag was Norma Provencio as head of the audit committee. Provencio previously held the same post at a small company that went by names including Signalife Inc., which went bankrupt after a half decade of fraud.
Provencio, who wasn’t accused of wrongdoing at Signalife, didn’t respond to a request for comment. A spokesman for Valeant declined to comment, while pointing to a previous company statement that described Provencio as having an “accomplished professional background and qualifications.”
On Oct. 15, Hempton sent Ackman a taunting e-mail, saying he wanted to say just one word: Philidor. Days later, short-seller Andrew Left issued a report on ties between Valeant and Philidor RX Services LLC, a controversial mail-order pharmacy that was helping to boost sales, questioning whether Valeant was the “pharmaceutical Enron.” The shares plunged as much as 40 percent that day. Hempton says they’re going to zero. The stock dropped 0.7 percent on Monday.
Ackman disagrees. His firm increased its stake in the drugmaker after the news of Philidor and he became a director in March, meaning Pershing Square now has two board seats. While a lack of early disclosure on the relationship between the company and Philidor created uncertainty, specialty pharmacies are an increasingly important distribution channel for the industry, Pershing said in October.
“Part of the fun of short selling is that there are puzzles after puzzles after puzzles,” says Hempton. Valeant’s huge market value meant “the David and Goliath aspect of it was kind of fun.”
The conflict between the two men goes back to Herbalife, the nutrition company Ackman says is a pyramid scheme preying on people with low incomes and Hempton views as highly ethical. Hempton, who says he’s owned the shares since Christmas Eve, 2012 -- shortly after Ackman announced a $1 billion short -- says Bronte visited the firm’s distributors in countries from China to Israel to research whether the company was the real deal. He says he spends two months a year on the road testing assumptions. Herbalife has more than doubled since Hempton bought the stock. It slipped 0.1 percent on Monday.
The U.S. Federal Trade Commission has been investigating Herbalife’s marketing practices since 2014. In May, Herbalife’s shares surged after the company said it was in late-stage talks to resolve the probe, and expected to pay about $200 million. Ackman has been stepping up criticism of the company through a series of videos published on Pershing Square’s Facts About Herbalife website. Herbalife has aggressively denied his allegations.
Short-selling has a moral purpose, according to Hempton, but he doesn’t care that much for it. His real mission is to make money for investors, and he does that mostly through finding things to buy. Bronte’s stock-picking method, which Hempton says comes from his days at Platinum, is to:
- work out what the company does,
- check management are allocating capital properly
- and make sure the shares aren’t overvalued.
Bronte often buys companies that make a part of something bigger, such as Rolls-Royce Holdings Plc, which develops jet engines. The fund’s also betting that phone companies such as Verizon Communications Inc. will be able to raise prices as mobile-data usage surges more quickly than the telecommunications industry can add capacity.
“Going long is really, really hard,” Hempton said. “Everyone seems to think it’s easy. It isn’t. It’s not easy because you don’t know about the future,” he said. “On the shorts we are right almost all the time. On the longs we are not. Shorts are just easy but the risk management is hard and the timing is hard.”
At a hedge fund conference in Hong Kong earlier this year, Hempton presented a case of a short that went wrong, a Canadian gold miner where he said his thesis fell apart even after intricate research. On timing, Valeant doubled after he first bet against the firm, and even on the way down he says he missed some of the profits. While Bronte counts millionaire Australian Prime Minister Malcolm Turnbull among its investors, the hedge fund has found it hard to attract institutional money.
Bronte’s separately managed accounts for U.S. clients delivered a 32 percent annual gain from 2009 to June 2014. The Amalthea Fund for Australian investors made an annual return of 15 percent in the three years through May. The fund rose 5.1 percent in May after two months of declines.
Hempton “doesn’t subscribe to or use broker research at all,” said Daniel Liptak of Melbourne-based Arkaba Advisors, which helps clients with investments in alternative assets. He lives “outside of the time zones of most of the other large, global hedge funds. He has an incredible gift of memory of facts and figures. All those three things combine to provide quite a unique view of the world. It doesn’t mean he’s always right.”
Anton Tagliaferro, founder of $4.5 billion money manager Investors Mutual Ltd., says Hempton is intelligent, tense and a little bit odd. On the last point, Hempton agrees. He says he’s always been an outsider, preferring pursuits like hiking and cross-country skiing, and his disagreement with Ackman is the latest in a history of picking fights that dates back to organizing environmental protests in Sydney in the late 1980s.
“I am eccentric,” Hempton said. “My wife thinks I’m weird. My son thinks I’m weird,” he said. “On the surf beach it doesn’t matter that I’ve made some enemies. It genuinely doesn’t matter. It would be nicer if people thought highly of me than not highly of me but it really doesn’t matter.”