When renowned investors William Ackman and Carl Icahn began their public feud over the value of nutrition company Herbalife Ltd. (HLF), some analysts reviewed the company’s public filings for themselves before choosing which investor to side with. John Hempton, chief investment officer at Bronte Capital, decided that there was no substitute for firsthand observation and tested Ackman’s investment thesis by visiting an Herbalife nutrition club in Queens. Afterwards, he published a frank discussion of his experience.
Through his firm, Hempton is primarily involved in short selling companies that he suspects are engaged in fraudulent activity. As he puts it, “Through short selling I stick up my sail on my little boat in the hurricane of theft and some of that loot drops into the cabin.” Although Hempton routinely uses an irreverent tone when writing online, his work has performed a valuable service by exposing and reporting financial misdeeds. For example, his letter to the Australian Securities and Investments Commission resulted in an Australian fund manager, Trio Capital, having its assets frozen and ultimately seized by regulatory authorities.
Before Hempton visited the Herbalife nutrition club, he conducted research to determine the best time of day to visit and made arrangements to have a Spanish translator with him so he could talk to the club’s owner and clients during his investigation. He arrived early in the morning and tried all of the Herbalife products available at the club. Hempton wrote, “It was striking how totally Bill Ackman’s thesis fell apart from observing for just a few hours,” and went on to call it “the most easily falsified bear-thesis I have seen from a major hedge fund ever.” In Hempton’s opinion, Herbalife is not breaking any laws.
It remains to be seen whether regulatory authorities in the United States agree with Ackman’s assertions that Herbalife is engaged in illegal activity, although the U.S. Securities and Exchange Commission opened an inquiry into Herbalife in December 2012 and early reports incorrectly stated that the U.S. Federal Trade Commission had opened an investigation.
In the stock market, Herbalife beat analysts’ estimates for the fourth quarter of 2012, and prominent investors have taken sides both for and against the company — Daniel Loeb of Third Point has announced significant holdings in the company, and short seller James Chanos of Kynikos Associates stated that he closed a short position on Herbalife in 2012.
Hempton will be speaking at the 66th CFA Institute Annual Conference in Singapore, where he will discuss the financial and ethical considerations of short selling. You can register now to hear Hempton in person, and follow this blog for more updates.
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