Wednesday, February 13, 2013

Hedge Fund Investors Are Sure Losers in Herbalife Fight

From the Globe and Mail: As Bill Ackman, Dan Loeb and Carl Icahn do battle over Herbalife Ltd., it is impossible to predict which hedge-fund manager has bet correctly and will “win.”

…..Ackman has been betting that Herbalife is operating a pyramid scheme and, therefore, is overvalued. Loeb has taken the opposite position. Icahn, meanwhile, has been rumored to have followed Loeb and gone long on the nutrition-products company.

What is certain is that as soon as Loeb placed a big long bet against Ackman’s short bet on Herbalife, investors in the funds, as a group, became the losers because of the way hedge- fund compensation works. If you are an investor in both the Ackman and Loeb funds, the total return before fees on the Herbalife trade will be 0 percent. Whatever Ackman makes, Loeb loses; and, vice versa. If Ackman makes $1 billion, Loeb loses $1 billion...

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