Herbalife allegations are 'hedge fund porn'
SYDNEY-BASED fund manager John Hempton has become an outspoken player in a clash between two of Wall Street's biggest hedge funds over US-listed nutrition supplement company Herbalife, describing watching the battle as the "hedge fund's equivalent of porn".
"It's a battle royale between two of the biggest hedge fund managers in New York," Hempton told The Weekend Australian last night from New York, where he has been for the past week.
"It's so spectacular that it is all anybody in the financial market here is talking about.
"This is going to lead to the great demise of one of the big hedge funds of the age.
"People will make movies about this one."
Appearing on US financial television network CNBC in New York this week, Hempton called Herbalife a "scumbag company" but strongly disagreed with US hedge fund manager William Ackman, who has taken a $1 billion short selling position in the company, that the US Federal Trade Commission will be forced to move against the company.
Herbalife has sales of more than $US4 billion and a network of 3.2 million salespeople in more than 80 countries, including Australia.
Hempton's Bronte Capital, a small fund based in Bondi Junction in Sydney's eastern suburbs, bought into the company on Christmas Eve after its share price received a battering following a high-profile presentation by Ackman attacking Herbalife as a pyramid selling organisation that he said was ripping off its distributors.
Ackman, who runs the $11bn ($10.4bn) Pershing Square Capital Management, had outlined his criticisms of Herbalife in a three-hour presentation to a high-profile audience in New York on December 20, sending its share price down from $US40 to $US26.
Hempton, who has since bought more shares in the company, came out strongly against Ackman's argument in his blog.
He was joined by US hedge fund operator Daniel Loeb, who disclosed this week that he has an 8.2 per cent stake in Herbalife through his company Third Point Capital.
Loeb has argued that Ackman's thesis on Herbalife, which concludes that Herbalife's shares will fall to zero, is "preposterous".
Hempton wrote on his blog that the battle between the two hedge fund operators, Loeb and Ackman, would be the "hedge fund equivalent of (the battle of) Stalingrad".
"Someone is going to lose big and the victor will be so bloodied that the word victory will sound hollow," he wrote.
"For a short seller who is as risk-averse as me, watching this is pure hedge fund porn."
Hempton was invited to appear on CNBC this week and argued that if governments were not prepared to shut down tobacco companies whose products caused many people to die, they would not act against Herbalife.
"They (Herbalife) are scumbags but they are scumbags working for stockmarket investors," he said.
"They are highly cashflow-positive scumbags and they will use the cashflow to buy back shares."
Hempton, a former official of the federal Treasury and an executive with Kerr Nielson's Platinum Asset Management, is better known for his role as a short seller through Bronte Capital, which he set up three years ago.
He approached the Australian Securities and Investments Commission some years ago with his concerns about the Albury-based Trio Capital, which collapsed in 2009, in the largest superannuation fraud in Australian history.
He has since been active in warning about potential frauds in the superannuation system in Australia and this week revealed that he had also approached the US Securities and Exchange Commission about instances of fraud involving US companies.
Herbalife, which has a strong following among Latinos in the US, made a long presentation to investors on Thursday defending its selling practices and its business model.
Hempton, who is keen to see Herbalife buy back more of its stock, argues that Ackman's big bet could bring down his hedge fund because of his large exposure. "Bill came out with this enormous, sanctimonious presentation which said Herbalife was a bad multi-level marketing company and the government should close it down," he told The Australian yesterday.
"Then he shorts an unbelievable amount of the shares -- at least 20 million shares, which is 20 to 25 per cent of the float of the company."
"I am an experienced short seller. I make 50 per cent of my profits short selling.
"But if you ever get that confident about a short the market is going to come and hit you so hard you won't be able to get up."
Hempton said Herbalife was a profitable company and was not going to collapse.
He said it made 80 per cent of its revenues outside the US, and therefore would still be a viable company even if US authorities acted against its operations in that country |
