Two Billionaires Fought in Public Over One Stock
A prominent short seller and an equally prominent buyer took opposite sides on Herbalife and argued about it on television. The episode is a lesson in the mechanics of short selling.
The Positions
Bill Ackman announced a large short position in Herbalife, presenting a detailed public argument that the company operated as a pyramid scheme and would ultimately be shut down by regulators.
Carl Icahn took the opposite side, accumulating a substantial long position and arguing publicly that the analysis was wrong. The disagreement produced a widely watched televised confrontation between the two.
Why Going Public With a Short Is Different
An activist investor with a long position benefits from publicity in a straightforward way. Attention can attract other buyers, and the investor can wait indefinitely while a thesis develops.
A public short position operates differently in several respects. Announcing it invites opponents to take the other side deliberately, particularly when the position size is known.
Publicising a short tells everyone that a large forced buyer exists if the price rises. That information is valuable to anyone willing to push it.
The Structural Asymmetry
Short selling carries mechanics that make it harder than being long, independent of whether the analysis is correct.
Losses are theoretically unlimited, since a stock can rise without bound, while a long position can only fall to zero. The position size grows as it moves against you, since a rising price means a larger short exposure, which is the opposite of a long position where losses shrink the position.
Borrowed shares must be maintained, and lenders can recall them, forcing a buy in at an inconvenient moment. Borrow costs accrue continuously, and can rise sharply when a stock is heavily shorted.
And dividends must be paid to the lender of the shares.
The Regulatory Dependence
The specific thesis depended substantially on regulatory action. That is a difficult foundation for a trade, because regulatory processes have no timetable and no obligation to reach any particular conclusion.
The eventual outcome was a settlement requiring the company to restructure aspects of its business practices and pay a substantial sum, without the finding that the short thesis had anticipated. The position was ultimately closed at a significant loss.
What the Episode Demonstrates
Several points generalise. Being right about a business can coexist with losing money on the trade, if the timing, the funding, or the mechanics do not cooperate.
Publicising a position creates a constituency with an interest in your failure. And a thesis dependent on a third party acting, particularly a regulator, adds a variable outside your analysis and outside your control.
Short sellers perform a genuine function in identifying overvaluation and fraud, and several cases in this series were uncovered by them. The structural difficulty of the position is exactly why that work is scarce.
The Bottom Line
The Herbalife fight showed that a short position is a bet on analysis, timing, borrow availability, and sometimes on a regulator. Losses grow the position while gains shrink it, which is the asymmetry that makes shorting hard.