MLM Pair Trade (HLF, USNA)

The Herbalife battle is now in full swing, with many well-known managers opposing an-equally well-known Ackman of Pershing Square Capital Management.

I now posit a biased-pair trade (long HLF, short USNA in slighly larger size) to take advantage of arguments on both sides.

Ackman has described HLF as the "best-managed pyramid scheme in the world" - so what is the worst? I believe a good candidate is USNA (Usana Health Sciences), whose distributors are actually going to jail because of employment at USNA.

The fundamental thesis is that any enforcement action that affects HLF will affect USNA even more, although there is no guarantee of either (USNA is far more dependent on China and the catalyst is there).

The best case scenario is that USNA is shut down (by Chinese authorities) or simply slows growth significantly, while HLF squeezes Ackman out of his short simply through robust operations & lack of US enforcement. In the meantime, the daily swings are limited because both are Multi-Level Marketing companies (MLMs).