5In order to mitigate the risk of further mark-to-market losses on Herbalife, in recent weeks wehave restructured the position by re ducing our short equity position by more than 40% andreplacing 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 areasonable time frame we will make a similar amount of profit as if wehad maintained the entireinitial short position–while mitigating the risk of further substantial mark-to-market losses–because our exposure on the put options is limited to the total premium paid. In restructuring theposition, we have also reduced the amount of capital consumed by the investment from 16% to 12% of our funds.We were able to restructure the position cost effectively due to several factors. Over the last 60or so days, the cost to borrow Herbalife shares has declined substantially while the stock pricehas risen. Shortly after we filed a formal complaint withthe SEC regarding what we believe tobe unlawfully manipulative conduct by other market participants , the cost to borrow Herbalifeshares dropped substantially to the lowest rate since prior to our presentation last December.In an unrelated recent enforcement action, the SEC confirmed thatattempting to engineer a short squeeze by removing stock from the available lending baseis a form of market manipulation.Because of the rise of the stock price, the low cost of borrow, and the fact that we are betting onthe failure of the Company, we have been able to purchase long- dated, privately negotiated out - of - the- money put options on terms that offer us an attractive opportunity for profit versus theircost. Furthermore, by substantially reducing the size ofour short position as a percentage of theshare float, we minimize the risk of so - called short squeezes or other technical attempts bymarket manipulators to force us to cover our position. In that a substantial component of the bullcase on Herbalife is predicated on forcing us to cover, we think the restructuring of our investmentnegates this important pillar of the bull case.The biggest risk of the restructured position is that time begins to be a factor with respect to aportion of our investment.We believe, however, that the long - term nature of the options we ownwill provide sufficient time for us to be rewarded on this portion of our position. In that theoptions are privately negotiated, over-the- counter contracts, we have the ability to extend their terms ,if we deem it prudent and attractive to do so in the future.At yesterday’s closing price of $72.84, we believe the potential reward from being shortHerbalife is extremely attractive relative to the risk of loss. Using the average analysts’ price target of $77 per share – which assumes that the Company is operating entirely legally –investors have less than 6% upside compared with 100% downside if the Company is determinedto be a pyramid scheme by regulators.In my vareer, I have not seen a less attractive risk - reward ratio than a long investment inHerbalife common stock at current levels.
