Uh-oh. What if Ackman is wrong on Herbalife?

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Is Bill Ackman starting to sweat?

Not even a month has passed since the hedge fund manager at Pershing Square Capital Management announced a massive $1-billion (U.S.) short position against Herbalife, betting that the shares will fall. Since then, other prominent investors have declared his investment thesis dead-wrong and bet against him by buying Herbalife shares.

One investor has even raised the issue of whether Mr. Ackman's big bet has damaged his reputation and the health of his fund. If that proves to be the case, you have to wonder what the impact will be on some of Mr. Ackman's other substantial holdings, including Canadian Pacific Railway Ltd. and J.C. Penney Co. Pershing Square is the biggest investor of both firms.

Mr. Ackman's move against Herbalife Ltd. – a company that sells weight-loss drinks through a network of distributors, who then recruit new distributors – was revealed in a three-hour presentation in December, when he compared the business model to a pyramid scheme. He argued that the Federal Trade Commission will shut down the company and the share price will fall to zero. At the time, the shares traded at more than $37.

"This is the highest conviction I have ever had about any investment I have ever made, full stop," he said in a follow-up interview on Bloomberg Television last month.

Given that level of confidence, it is no easy matter to bet against Mr. Ackman – but investors have been doing just that over the past few weeks. On Wednesday, the Wall Street Journal reported that Carl Icahn had taken a "small" position in the stock. Daniel Loeb of Third Point has bought an 8.2 per cent stake.

And, most vocally, John Hempton, a hedge fund manager at Bronte Capital in Australia, was among the first to declare publicly that he had invested in Herbalife subsequent to Mr. Ackman's presentation.

He has since visited a Herbalife nutrition club in New York, an experience that added to his conviction that Mr. Ackman's investment thesis is wrong: Far from being a pyramid scheme that overcharges for what are essentially commodity-like products, Herbalife's business model offers a social support group for weight loss. He compares it to Alcoholics Anonymous.

"Bill Ackman, a Harvard educated (magna cum laude) billionaire New York hedge fund manager, bet over a billion dollars on a short position (imperiling his fund and his reputation) without checking the facts," Mr. Hempton said in a blog post detailing his visit to the nutrition club.

"And he did not check the facts because he was so rigid with a misplaced silver spoon that he could not stoop to sit on a subway for thirty minutes and talk with poor people for ninety minutes."

After Mr. Ackman made his presentation, Herbalife's share price dipped as much as $11, but has since rebounded about $20, or 77 per cent, from that low. The shares are now 24 per cent higher than they were before the presentation.

That must hurt Pershing Square if it has held on. And though these are early days in this battle, it surely isn't unfolding the way Mr. Ackman had anticipated.

His investment style is bold, and he often takes very large positions in stocks. Pershing Square has a 17.8 per cent stake in J.C. Penney, worth $730-million. Its 13.9 per cent stake in Canadian Pacific is now worth $2.6-billion (Canadian). And it recently invested $2-billion (U.S.) in Procter & Gamble. These three stocks alone account for about half of Pershing Square's $11-billion in assets.

A narrow portfolio is great when things go well, but potentially awful when things go wrong. If investors bolt and the management company is forced to liquidate positions, it could turn to Canadian Pacific or J.C. Penney.

CP has risen more than 60 per cent since Ackman declared his position in it, making profit-taking look like an easy decision. On J.C. Penney, shares fell 44 per cent last year, making it look like a lost cause. Given that it isn't easy to unload big positions, the selling pressure could weigh heavily on the share prices.

In other words, if Mr. Ackman is wrong about Herbalife, the impact will resonate well beyond the New York nutrition club Mr. Hempton recently visited.