“It’s gonna be a big number,” predicted hedge fund boss Bill Ackman on Thursday December 20th, as he launched one of the more innovative examples of philanthrocapitalism we have seen.
He had spent the previous three hours making the case that Herbalife, a vitamin supplements company which a day earlier boasted a stock market value of nearly $5 billion, was a pyramid scheme. As a result, his Pershing Square hedge fund had taken a very large “short” position that will pay off handsomely if Herbalife’s share price falls, which on news of Mr Ackman’s bet it started to do. By the close of the market that day, Herbalife’s share price was down to around $33 from over $42 two days earlier, and a high of $73 in April. If there is any truth to the powerful moral and legal case Mr Ackman and his team laid out against Herbalife, the share price could plunge a lot further, increasing Mr Ackman’s profits as it does so.
As for that “big number”, Mr Ackman has promised to give away all the profits he makes from this bet. If this is as much as he expects, most of the money will go to his Pershing Square Foundation. But Mr Ackman guaranteed that $25m will go the Sohn Conference Foundation, a pediatric cancer charity that hosted his onslaught against Herbalife. Amusingly, the foundation served Herbalife nutritional drinks to the audience listening to Mr Ackman, a nice touch.
The Sohn Conference Foundation is itself a clever philanthrocapitalistic innovation, named for Ira Sohn, a Wall Streeter who died of cancer at the age of 29. Created in 1995, the foundation holds a conference in New York each year at which leading investors donate a new investment idea to an audience that has paid a fortune to the charity to attend. (It now also holds a London event.) In 2007, Mr Ackman donated the idea that MBIA, a bond insurer, was overvalued, a thought that would have made anyone in the audience who acted on it a lot of money. Mr Ackman gave away the $140m he personally made from that trade to seed his foundation. His promised $25m this time will pretty much double what Sohn has raised since its creation.
Short selling has a bad reputation in finance, in our view mostly because it is misunderstood. Having some investors brave enough to bet on a fall in price helps keeps prices accurate and honest, taking some of the air out of bubbles based on the irrational exuberance of others. But beyond driving down the Herbalife share price to its proper value, Mr Ackman believes there is a greater social benefit in bringing the company’s alleged failings to light.
He argues that Herbalife’s pyramid scheme (if that is what it is) preys upon the poor and weak in society, by selling them a false hope of gaining easy prosperity by becoming a distributor of Herbalife products. (You can judge these allegations for yourself by looking at Mr Ackman’s epic Powerpoint presentation here.) He calculates that between 2006-12, over 1m people (well over 90% of those who tried) failed in their attempt to make a living as a Herbalife distributor. The cost of trying to succeed is considerable, he claims, suggesting total losses suffered by those unsuccessful distributors were at least $3.8 billion, money those people could ill afford to lose. If the result of Mr Ackman’s allegations is to stop more people losing their money in a pyramid scheme, then his shorting of Herbalife’s shares will have been a notably impactful investment. Herbalife’s management strongly denies the allegations.
Impact investing is the new buzz phrase for investing money with the goal of simultaneously making a financial return and improving society, as Paul Bernstein, the head of Mr Ackman’s Pershing Square Foundation explains in this video. Short selling by a hedge fund is not normally thought of as impact investing, as the philanthropic types promoting impact investing have in mind something more gentle and creative. Yet if Mr Ackman is onto something with his move against Herbalife, perhaps impact investors will start to see shorting as a valuable tool of social progress.