K Street's new gig: Lobbying government for hedge funds

Here’s a growing business model in the financial world: bet that a company’s stock will crash, then sic the federal government on the company.

Politically connected hedge-funder Bill Ackman has been open about this. He shorted the nutritional supplement company Herbalife in late 2012, blasting it publicly as a “pyramid scheme.” Now, after months of lobbying Congress and the executive branch, he’s succeeding in sending the Federal Trade Commission after Herbalife.

Expect more of this lobbying-assisted investing as hedge funds and private equity firms lose their aversion to politics and dive more deeply into Washington.
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Ackman announced in December 2012 that he was taking a $1 billion short position on Herbalife. To simplify: He borrowed a billion dollars worth of Herbalife stock and sold it. If the price falls before the term of the loan, he buys back the shares at a lower price, returns the stock to pay off the loan, and pockets the difference. In other words, if the value of the stock falls to $500,000, he could make $500,000, minus interest, transaction fees and, in this case, lobbying costs.