Carl Icahn supports Bill Ackman for once.
Investor Ackman sent a letter to Pershing Square Capital Management clients late Wednesday saying that he had restructured his so-far losing Herbalife bet by reducing the fund's short equity position by more than 40 percent and replacing it with over-the-counter put options, a type of long-term derivative.
Ackman said the move was to reduce the risk of more mark-to-market losses on the nutritional supplement company—the stock is up about 163 percent since its nadir shortly after Ackman announced a $1 billion short position in December—but that he still has "enormous conviction in our investment thesis."
Icahn, $500 million richer because of Herbalife's ascent, remains happily long.
"I'm certainly happy I made the profit," the chairman of Icahn Enterprises told CNBC late Wednesday about his gain in the stock and Ackman's recent move. "I think his purchase is a judicious one because I continue to believe the company is still meaningfully undervalued."
(Read more: Icahn, Ackman in Epic Showdown of Billionaires)
Ackman did not immediately respond to a request for additional comment.
An Herbalife spokesman declined to comment. But the company recently told CNBC.com this in reaction to Ackman's allegations of deceptive accounting practices: "As Mr. Ackman continues to lose his investors' money on a reckless $1 billion bet against Herbalife, he has become increasingly desperate."
Pershing Square International, the firm's largest fund at $4.71 billion, is up 0.2 percent this year through September after gaining 0.2 percent last month, according to an investor update obtained by CNBC.
Pershing Square's assets under management now total $10.77 billion, according to the letter. That's down from $13.19 billion on March 1, 2013, according to the firm's most recent regulatory filing.
(Read more: Ackman to PwC: Herbalife could get you in trouble)
Ackman said the appreciation of Herbalife stock allowed him to restructure his bet to the advantage of limited partners.
"The restructuring of the position preserves our opportunity for profit–if the Company fails within a reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position," Ackman wrote. "In restructuring the position, we have also reduced the amount of capital consumed by the investment from 16 percent to 12 percent of our funds."
A longtime Pershing Square investor applauded the move. "I'm certainly happy to see him move the position from an outright short to options to limit the downside," the person said.
Ackman also said recently developments around the company have only reinforced his conviction it is a pyramid scheme.
He noted various state, federal, and international investigations and inquiries are already in process with more likely to come. And he said Pershing Square had been contacted by whistleblowers in recent weeks who "provided us with information that is confirmatory of our thesis that Herbalife is a pyramid scheme while raising additional concerns that we had not previously identified."
Ackman added another warning for company bulls like Icahn: "In my career, I have not seen a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels."
—By CNBC's Lawrence Delevingne. Follow him on Twitter