Derpalife: How a Health-Supplement Company Became a Hedge-Fund Pissing Match

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Fight fight fight! Photo: Daniel Acker/Bloomberg News, Najlah Feanny/Corbis

As the alpha males of Wall Street's gorilla tribe, hedge-fund guys naturally like to fight each other. Sometimes, they do it literally — with gloves, in a boxing ring. Other times, they fight by taking opposing stakes in little known nutrition-supplement companies and duking it out in the press.

The latter is happening right now, with Dan Loeb and Bill Ackman — two of Hedgistan's most famous chest-beaters — taking aim at each other over Herbalife, a health-supplements company that used to fly under Wall Street's radar. As with most Wall Street fights, the Herbalife battle is not really about money. (Ackman has already said he's giving proceeds from his bet against the company to charity.) It's a face-off of egos, and a pissing contest between two activist investors who have burned each other before, and who are each determined not to be the loser this time around.

Here's the short version of what has happened in L'Affaire Herbalife so far: Last month, Ackman gave History's Longest Powerpoint about why Herbalife, a $4.3 billion company that sells diet pills and nasty-tasting shakes through an Amway-like network of "distributors," is actually an illegal pyramid scheme that uses false advertising to lure in poorly educated minorities. Ackman thinks that Herbalife will eventually be shut down by the FTC and predicts that the company's stock will become worthless. He has reportedly short-sold $1 billion worth of Herbalife stock, betting on the company to fail.

Loeb, on the other hand, is rooting for Herbalife. Yesterday, his hedge fund, Third Point, disclosed that it had bought almost 9 million Herbalife shares, representing more than 8 percent of the company. Loeb's investor letter — which, in a hilarious twist of passive-aggressiveness, referred to Ackman only as "the short seller" — said that Ackman "presented no evidence to show that Herbalife has crossed a line that would compel regulators to shut it down."

Today, Herbalife itself weighed in, with a bizarre two-hour investor presentation in which company executives responded to Ackman's accusations by quoting elderly widows, talking up hugs, and called Herbalife "a fabulous company with an incredible future." (It seems to have worked; the stock is up on the day.)

In general, Ackman and Loeb play a similar game. Both are skilled media manipulators and love the attention a public campaign can bring, and both have a history of publicly assailing companies they suspect are not being well-run. (Loeb's version of the MBIA short was getting the CEO of Yahoo fired for résumé-padding.) With both Ackman and Loeb, as well as other activist investors and short sellers like Jim Chanos and David Einhorn, prophesies have a way of being self-fulfilling — a well-known hedge-fund manager goes on CNBC to advertise his latest short, the stock falls, the manager gets an easy profit.

Despite being described as "friends" by the Times, Ackman and Loeb also have a history of bad blood. In 2009, Loeb invested in an Ackman fund that was making a huge, leveraged bet on shares of Target, the big-box store that was once a target of Ackman's agitation. When the fund failed to produce results, Loeb lost millions. According to Institutional Investor, Ackman's Target disaster gave Third Point one of its worst years on record.

Now the two men are dueling on opposite sides of the same company. The duel is nominally over the legality of Herbalife's business model, but it's more a perception-shifting campaign. Ackman needs regulators to take up his cause in order for his pyramid-scheme thesis to work; Loeb is applying pressure to regulators not to take their marching orders from a rich Manhattan hedge-fund manager. Ackman has in his corner the fact that Herbalife is a sketchy company with a shady-sounding distribution scheme; Loeb has in his the fact that there are lots of sketchy companies that don't get put out of business by the FTC.

Nobody knows what will happen to Herbalife, and few people outside Wall Street care. As Felix Salmon noted, Ackman's pyramid scheme thesis is fairly tenuous. And some smaller hedge-fund managers, sensing a weak link or two in Ackman's theory, have made compelling cases against Ackman's jeremiad. Herbalife has lawyered up in response to Ackman's charges, hiring super-attorney David Boies to help it prepare a big rebuttal. The SEC is now opening an investigation into the company's business model, and noted Ackman enemy Carl Icahn is reportedly jumping in on Loeb's side.

But this fight has little to do with Herbalife anymore. It began as Ackman's attempt to ambush an unsuspecting company and bend regulators to his will. Yesterday, it became Loeb's attempt to get revenge for the Target flop of 2009 and call Ackman's bluff. And now it's a massive, expensive arm-wrestling match over the future of a small, largely unimportant enterprise, between two (maybe three) hedge-fund divas who can't bear the thought of losing. Especially to each other.