(Reuters) - Herbalife Ltd (>> Herbalife Ltd.) shares rallied as much as 7 percent on Friday as investors rejected the latest salvo from hedge fund manager Bill Ackman, who insisted the company is nothing but a pyramid scheme, even though his short position based on that view has cost up to $500 million.

Ackman, head of hedge fund firm Pershing Square Capital Management, told Bloomberg Television that his firm has lost $400 million to $500 million on its short bet against the weight-loss supplements company.

Ackman, who revealed his $1 billion short bet against the company in December 2012, said he is speaking with regulators about the company on at least a weekly basis.

"We are going to take this, as I say, to the end of the earth," Ackman, at the Robin Hood Investors Conference, said in the interview. He said that his $11.45 billion fund has still done well this year despite the Herbalife losses.

Herbalife shares gained nearly 7 percent, but pared their gains to be up 4.5 percent in afternoon trade.

The company has repeatedly denied that it is a pyramid scheme, which typically tries to make money by recruiting new members who pay fees rather than relying only on the sale of goods.

A Herbalife spokesperson blasted Ackman's ability to pick consumer product stocks, issuing a statement that also noted Ackman's heavy losses in J.C. Penney Co Inc (>> J.C. Penney Company, Inc.) this year.

"Mr. Ackman presented nothing new today," the Herbalife spokesperson said. "After a year of baseless claims about Herbalife and hundreds of millions of dollars of losses for his investors, the only thing Mr. Ackman has proven with his obsessive, ego-driven investing decisions is his lack of understanding of consumer product companies."

Ackman told Bloomberg TV that Herbalife investors should be troubled the company has yet to release an expected audit.

"Every day that goes by without an audit, I can't believe people can own the stock," Ackman said.

Ackman said fellow hedge fund manager David Einhorn of Greenlight Capital's question on a conference call over a year ago regarding the multi-level marketing company's retail sales was "critical" to whether the company is a pyramid scheme.

"One of the critical measures of whether this is a pyramid scheme or not is a question that David Einhorn actually asked on a conference call a year and a half ago: what percentage of your sales are outside the system?" Ackman said.

Ackman, who said he did not know of any other big investor who has made a short bet against Herbalife, told Bloomberg he took the risk of a short squeeze "off the table" by replacing about 40-43 percent of Pershing's short with a long-dated put option position a month and a half ago.

A short squeeze is a trading scenario that occurs from time to time in heavily shorted stocks, when bearish traders are forced to buy shares to avoid big losses - something that ends up pushing the stock only higher.

Investors such as Carl Icahn, George Soros, and William Stiritz have taken an opposing position to Ackman by investing heavily in Herbalife shares.

Ackman said that he found it an "interesting fact" that 80-year old billionaires had taken long positions in the company.

The Herbalife spokesperson said Ackman has got it wrong about the nutrition company, just like some of his other wrong-way bets: "This is evidenced by his sizable losses at Target, Border's, which went bankrupt, and his disastrous involvement with J.C. Penney. He can add his Herbalife short to that list."

Ackman, who reported nearly 10 percent stakes in the common shares of mortgage financiers Fannie Mae (>> Federal National Mortgage Association) and Freddie Mac (>> Federal Home Loan Mortgage Corp) on November 15, also said that his firm does not support Bruce Berkowitz of Fairholme's plans to take the financiers' insurance businesses private.

He said that he sees greater opportunity in the common shares of Fannie Mae and Freddie Mac than he does in the preferred shares.

Berkowitz's Fairholme Funds scooped up preferred shares of Fannie Mae and Freddie Mac with a face value of $3.5 billion at a massive discount, as well as some common shares.

(Reporting By Sam Forgione, Tim McLaughlin and Ross Kerber; Editing by Tim Dobbyn)