Short Seller Activist Spotlight: Bill Ackman

Most hedge fund managers live in the shadows, with little fame or press, not Bill Ackman, who is one of the most famous hedge fund managers of our time. He’s known best for predicting the 2008 financial crisis by aggressively shorting MBIA and their bonds, and his “big short” on Herbalife, which he claims is a Ponzi scheme. He is currently the CEO of hedge fund Pershing Square Capital Management, a long-short value fund with a focus on activist investing.

 

Who is Bill Ackman?

Ackman got his start in finance through the real estate sector, in his father’s business, Ackman Brothers & Singer Inc., where he did structured finance for real estate developers. He went on to co-found Gotham Partners with his partner David Berkowitz, which they were forced to liquidate in 2003 after an unfortunate investment in golf course real estate. Shortly after the liquidation, he started his new and current fund, Pershing Square Capital Management where he began to get more into activist investing.

 

Herbalife

In December 2012, Ackman and Pershing Square announced their short position in nutritional supplement-based multi-level marketing company Herbalife at a presentation called “Who Wants to Be a Millionaire,” poking fun at Herbalife’s hefty claims to their affiliates. During the presentation, Ackman and his team of analysts showcased over 300 slides explaining why they think Herbalife is “the best-managed pyramid scheme in the history of the world,” in Ackman’s words.

Here is the full video of his presentation in 2012:

 

Once the short position was public, Ackman and Pershing Square went all out in their efforts of promoting their thesis. The website FactsAboutHerbalife.com was launched, ran by Pershing, and eventually, a documentary, Betting On Zero, was produced about Herbalife and Ackman’s short.

In addition to their marketing campaign, which is estimated to have cost Pershing around $50 million dollars, Ackman hit the streets and lobbied anyone who could help him expose or bring regulatory pressure upon Herbalife. He lobbied a slew of politicians, of whom Linda Sanchez wrote a letter to the FTC, asking them to investigate Herbalife. After seeing limited success from his efforts in Washington, he turned to civil rights organizations, mostly Latino groups, as Herbalife has been criticized for targeting recent Latino immigrants.

What Pershing Square may have thought was a cut-and-dry short position, resulted in an all out war between billionaires, regulators, and special interest groups. Ackman came under fire personally from Washington, the press, even the FBI. Pershing Square reportedly spent over $50 million dollars on a public relations campaign to discredit Herbalife, and Ackman publicly lobbied a slew of politicians.

The heat received from the press and Washington probably wasn’t news to Pershing Square or Ackman. The classic “Hedge fund billionaire plays moral high ground to manipulate stock,” headline was to be expected. However, what they likely didn’t expect was other billionaire fund managers like Carl Icahn and George Soros to take the other side of the trade. For Icahn and Ackman, it was personal.

Icahn and Ackman battled it out on CNBC multiple times. See the highlights of their public battle below. Additionally, here, here, and here are the full interviews of their battle.

Ultimately, Ackman’s short position relied on the FTC classifying Herbalife as a pyramid scheme, which has not yet happened. The FTC had a ruling on Herbalife’s business model, which did not declare the pyramid scheme, although the chairwoman of the FTC, Edith Ramirez, had this to say:

Man asking question: “It sounds like what you’re saying is that this company has all the hallmarks of a pyramid scheme, isn’t that right?”

 

FTC Chairwoman, Edith Ramirez: “You know, our focus isn’t on the label. The word ‘pyramid’ does not appear in our claim, that is true… They [Herbalife] were not determined not to be a pyramid scheme.”

 

As of November 2017, Ackman closed his direct short position on Herbalife’s stock, and opened a large position in put options, allowing him more leverage and to limit the risk of the trade to 3% of Pershing Square’s total capital. After closing the short, Ackman had an estimated $455 million dollar paper loss on the position.

Resources:

MBIA

Ackman MBIA ChartCredit: Quoth the Raven from Seeking Alpha

Ackman essentially predicted the 2008 financial crisis as early as 2002. He began making bearish bets, in the form of credit default swaps and shorting stock, against MBIA, who was then the nation’s largest bond insurer.

In 2002, in preparing to release his report, “Is MBIA Triple-A?” Ackman met with then-CEO of MBIA, Joseph Brown. Ackman recalls this meeting in the book Confidence Game by quoting Brown:

“You’re a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we’re the largest guarantor of municipal debt in the country. Let’s put it this way: We have friends in high places.”

The premise of Ackman’s critique was their escalating risk profile by foraying into new structured finance assets like credit derivatives, CDOs, and synthetic CDOs. Additionally, he claimed the quality of the debt packed into these derivatives was declining, while the bond ratings stayed constant.

In classic Ackman fashion, he went all out in his pursuit of gains (and truth, too). He reportedly cornered the CEO of the accounting firm that handled MBIA’s books at a charity dinner to pitch his theory. He also had hours of meetings at Standard & Poor’s and Moody’s the two largest bond rating agencies to persuade them to lower MBIA’s rating.

He wrote to Moody’s in 2005:

“Moody’s Aaa rating is so powerful and credible that investors don’t do any due diligence on the underlying credit. Every day that Moody’s incorrectly maintains an Aaa rating on MBIA, these extremely risk-averse investors unwittingly buy bonds that are not deserving of Moody’s Aaa rating.”

After years of getting mocked as a market manipulating short seller, Ackman’s bets finally paid off in the first quarter of 2008, as the financial crisis was hitting. Ackman and his investors reportedly made over $1 billion from their MBIA positions.

Additionally, the author of Confidence Game was interviewed by Bloomberg about Ackman’s MBIA short:

Resources:

 

Summary

A controversial figure, Ackman has had a volatile career. After his first fund Gotham Partners went under in 2003, Ackman reported being in a low place in his life and career. Although he shortly rebounded in launching Pershing Square, that offered its own setbacks.

Additionally, Ackman has much more diverse skill set than short selling, his forte is activist long positions, where he takes enough of a stake in the company to get board seats, and forces the company to adjust their corporate structure.

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