REUTERS/Brendan McDermid
From the letter [via the NYPost]:
"In order to mitigate the risk of further mark-to-market losses on Herbalife, in recent weeks we have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over the counter put options. The restructuring of the position preserves our opportunity for profit--if the Company fails within a reasonable time frame we will make a similar profit as if we had maintained the entire initial short position-while mitigating the risk for further substantial mark-to-market losses-because our exposure on the put options is limited to the total premium paid. In restructuring the position, we have also reduced the amount of capital consumed by the investment from 16% to 12% of our funds."
So essentially what he did here was recognize losses and cover $400 million worth of Herbalife stock and then buy puts.
What he has also done by buying puts, though, is he has freed up capital and limited the money he would lose from the stock going up further. He will profit if the stock declines below his strike prices. He will only lose a little bit per share if the stock stays at the same level or goes up.
So far, Ackman's Pershing Square Capital Management has lost an estimated $500 million on his short position, the Post estimates.
Back in December, Ackman publicly declared at a special Sohn Conference event that he was shorting 20 million shares, or $1 billion, worth of Herbalife stock with a price target of $0.
Ackman said he believes the California-based multi-level nutritional products seller is a "pyramid scheme" that targets lower income people, especially from the Hispanic population. He believes that regulators, particularly the Federal Trade Commission, will be persuaded to investigate and shut the company down.
Since confirming his short position, Herbalife's stock has skyrocketed more than 71%.
He's still standing by that thesis in his latest letter, though.
"Since our presentation on Herbalife at the end of last year, we have not learned any facts that our inconsistent with our belief that the Company is a pyramid scheme that engages in unlawful and deceptive marketing practices," Ackman wrote in the letter, which was posted by the NYPost.
A number of hedge fund managers have disagreed with Ackman. A few of them snapped up long positions after he gave his massive 342-slide presentation.
His long-time rival billionaire investor Carl Icahn holds the largest long position in the company. Icahn has said that he believes Ackman will be the victim of the "mother of all short squeezes."
Icahn weighed in on Ackman's latest move last night.
Icahn on Ackman $HLF cover and $500m profit: "happy I made the profit. I think Ackman's purchase is judicious one bec co. still undervalued"
- Scott Wapner (@ScottWapnerCNBC) October 3, 2013
Herbalife's stock was last trading higher in the pre-market.