Herbalife (US stock ticker: HLF), a story of nutrition company, a MLM or network marketing company, a short-squeeze battle between hedge fund titans

Herbalife (HLF) is a company which sells nutrition, weight management and skin products through a network of independent distributors; some of whom earn profit on product sales and additional commission from a multi-level-marketing (MLM) compensation structure. In 2011, the Commercial Court in Brussels, Belgium, has ruled Herbalife to be an illegal pyramid scheme. The company has been criticized by, among others, Bill Ackman of Pershing Square Capital, who claims that Herbalife operates a "sophisticated pyramid scheme". The story goes on by a challenge of another hedge fund titan, Carl Icahn. Icahn claimed that Ackman is using the public media to drive the stock down for personal gain. In defense, Ackman claimed that the motivation of his short position on Herbalife is to increase awareness of public of this "sophisticated pyramid scheme", which has hurt many people by misleading them to the so called "financial freedom, business opportunity, working from home" gimmicks.


The term "Lead Generation Systems" (LGS) is used within Herbalife to refer to distributor-developed promotional systems, including the use of mass mailings, Internet and telephone solicitations, sign-posting, sales scripts and other techniques designed to increase recruitment of new distributors.

The use and impact of similar systems in Amway, the largest MLM seller, has been documented in books such as Amway Motivational Organizations: Behind the Smoke and Mirrors and Merchants of Deception . These writers demonstrate how high level Amway distributors can make more money selling lead generation systems to their downlines than they make in the commissions paid by Amway. Of course, in Amway as in Herbalife, the vast majority of distributors lose their investments and drop out.



So, bottom line, who will win the battle? Icahn or Ackman? It is hard to tell just by looking at the chart as the stock as of now is in consolidation money. Is it accumulating or distributing consolidation? From the volume perspective, it is neutral; there hasn't been a significant change in the on balance volume (OBV). So as of now, the short wins the battle. Fundamentally, it is very hard to drive a short squeeze on a troubled company. It is not impossible to see the stock breaks the consolidation range to get rid of the weak short and then stalls at $65, before it drifts lower. So a good strategy is to place ratio put spreads on 35/30 strike (buy 2 contracts on April 30 strike, sell 1 contract on April 35 strike)  for 50 cents credit on a $4.5 margin of risk. 12% return on risk, not bad for a 30-days trade until the next expiration.