By Svea Herbst-Bayliss and Katya Wachtel
BOSTON/NEW YORK, July 30 (Reuters) - Herbalife's surging stock price may be causing hedge fund manager William Ackman gastrointestinal pain now that he is nursing $300 million in losses due to his billion dollar bet that the nutrition and supplement maker's shares would fall.
Shares of Herbalife are trading up 30 percent from where Ackman's $12 billion Pershing Square Capital Management first began shorting them last year, after he labeled the company a pyramid scheme. Ackman has said he expects the stock to drop so far that it would eventually hit zero.
The short bet, made public in a widely covered presentation on December 20, 2012, drove the share price down 18 percent, to $34.24. But since then, it's been a bumpy ride for the manager and his investors, with Herbalife soaring 35 percent in the last month alone, to $61.08. That is well above the $50 a share where Ackman began shorting the stock last year.
The recovery in Herbalife's stock price - which has surged 85 percent this year alone - is weighing on Pershing Square's performance, leaving the fund with a modest 8 percent gain for the year and raising questions about just how long Ackman can afford to stick with his bearish bet.
One thing working in Ackman's favor and cushioning the impact of the loss is that several other stocks in Pershing Square's portfolio have performed well, especially Procter & Gamble, Howard Hughes and Canadian Pacific .
Ackman, 47, has called his short bet against Herbalife the biggest bearish bet of his career and said the roughly 20 million Herbalife shares he has shorted were bought with cash.
To short a stock, a trader usually borrows shares from a broker, putting down collateral, and then hopes the stock falls in price, at which point the trader can buy the shares in the open market, and use them to repay the loan - pocketing the difference as profit.
A short seller can quickly accumulate losses if a stock keeps rising in price and the cost of buying shares to close out or cover a short position becomes too great.
Pershing Square investors, including Blackstone Group and other funds of funds, plus state pension funds in New Jersey, Colorado and Massachusetts, will have to wait a few more days for Ackman to say just how painful the Herbalife short has been this month.
Halfway through July, when stock markets rebounded, Pershing Square was up about 2.2 percent for the month, boasting a return of about 8 percent for the year to date. But the mid-monthly gain came before shares of Herbalife rose sharply.
On Tuesday, Herbalife shares initially climbed as much as 5 percent, fueled by strong second-quarter earnings driven by global demand for its weight loss shakes and supplements. But the shares subsequently gave back ground to trade at $60.35, down 0.36 percent in late trading.
Also on Tuesday, Ackman took issue with Herbalife's earnings report in a five-page press release. He questioned the company's weak operating earnings, its use of what he said is a beneficial exchange rate with Venezuela and the fact that the company's new accountant has not audited the latest report.
He also noted that the company does not adequately address the departure of two senior distributors, even though it had previously said more generally that such defections could negatively impact sales.
Besides sending out the occasional press release, Ackman has been largely silent on Herbalife, shying away from the public pronouncements he made regarding his bet on JC Penney.
The success of his bet hinges on regulators -- the Securities and Exchange Commission, state attorneys general, or the Commodity Futures Trading Commission - which would have the power to put the company out of business if it were deemed a pyramid scheme. The agencies have declined to comment on any probes.
Ackman's desire to stay out of the limelight on Herbalife stands in sharp contrast to the bold tone he took in December, when many more investors also shorted the stock.
Since then, David Einhorn said his Greenlight Capital exited its own short position on Herbalife while Daniel Loeb's Third Point said it had made hundreds of millions by going long.
Billionaire investor Carl Icahn even joked two weeks ago that his long bet on Herbalife is paying off just fine, thanking Ackman for making him even richer. Patrick McCormack's Tiger Consumer Management also said in a regulatory filing that it owned 2.38 million Herbalife shares at the end of the first quarter.
To be sure, several of Ackman's investors have said they are not unhappy with his performance.
"We are heavily invested with him because he is good," said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has $185 million with Pershing Square. "We are not going to judge him by one holding alone and we are not going to be telling him what to do because we don't want our managers to be puppets."