UPDATE 2-Investor Ackman exits years-long Herbalife short bet to cap losses

(Adds details on Pershing Square performance, stock price)

Nov 1 (Reuters) - Activist investor William Ackman, who placed a $1 billion bet in 2012 that Herbalife Ltd's stock price would tumble to zero, said on Wednesday his firm has capped losses by closing out its short position in the nutrition and supplements company.

Herbalife has been buying back shares and its stock price has soared some 50 percent this year, piling pressure on Ackman's $10 billion hedge fund as paper losses mounted and the cost to borrow the shares rose.

Ackman did not disclose how much his firm, Pershing Square Capital Management, had lost by buying shares to cover its short position.

"We covered the shorts and replaced them with outright put positions," Ackman told Reuters, adding that potential losses on Herbalife will now be capped at 3 percent of the firm's capital. "We can still lose money but the loss is capped."

Short positions, in which borrowed shares are sold in hopes they can be replaced later at a lower price, have the potential for heavy losses that increase as a stock's price rises. Put options give the holder the option to sell a stock at a set price.

Herbalife's stock price has rose in part by its decision to buy back a big chunk of its shares, a move many in the market interpreted as trying to pressure Ackman into giving up on his years-long crusade against the company.

Herbalife stock dipped 0.1 percent to $72.56 on Wednesday.

Pershing Square International, the firm's hedge fund portfolio, nursed small losses for the year through the middle of October after logging double-digit losses in 2015 and 2016.

The fund reported a 1.5 percent loss for the first six months of 2017. Pershing Square said in its interim financial report that Herbalife was the fund's biggest loser for that period with a 4.3 percent decline.

For much of the last five years, since Ackman first unveiled the position in December 2012, Herbalife has been a thorn for Pershing Square as unrealized losses mounted.

Ackman has been betting the stock would crumble under regulatory scrutiny for what he has called a pyramid scheme. Herbalife has denied that claim. (Reporting by Svea Herbst-Bayliss in Boston; Editing by Chizu Nomiyama, Meredith Mazzilli and Jeffrey Benkoe)