Wednesday, February 13, 2013

Hedge Fund Investors Are Sure Losers in Herbalife Fight



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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