By Svea Herbst-Bayliss

(Reuters) - The fight over nutritional supplements company Herbalife Ltd gained intensity and drama on Wednesday as hedge fund titans Daniel Loeb and William Ackman are now squaring off.

Simply put, Loeb is betting Herbalife will flourish while Ackman is betting it will falter.

Loeb, fresh off a stellar 2012, gave the supplements company a shot in the arm on Wednesday, when his Third Point LLC hedge fund said it had taken a stake of more than 8 percent in Herbalife. The company's shares rose sharply.

Indeed, Loeb told investors that he expects the company's share price to do even better, forecasting it can trade between $55 and $68 dollars a share, maybe higher. Given the potential upside makes "the company a compelling long investment for Third Point," Loeb wrote in a letter obtained by Reuters.

The stock was trading near $40 on Wednesday, in the most active trading day in the company's history.

The move was announced one day before Herbalife, a 32-year old company which sells nutrition and weight management products through a network of independent distributors who are also paid for recruiting other sellers, scheduled its investor conference. Ackman, who is traveling abroad, plans to listen in by telephone.

And it comes less than a month after Ackman's Pershing Square Capital Management called Herbalife's business model a "pyramid scheme" and disclosed a short position valued at around $1 billion, betting that the share price will fall.

In a three-hour long presentation Ackman, one of his top lawyers and a top analyst said they believe Herbalife is a "pyramid scheme" because distributors earn more than 10 times as much from recruitment as they do by selling company products.

Herbalife has vehemently disputed Ackman's accusations.

Loeb and Ackman are sometime-friends, each with reputations for conducting strong research and delivering sharp-tongued bluster. As they now face off, investors and industry observers are bracing for a high-profile and public brawl.

"This will be a battle of firepower," said David Tawil, who runs hedge fund Maglan Capital.

Herbalife shares traded around a lot on Wednesday, jumping as much as 8.9 percent on news of Loeb's move before tumbling some 5.4 percent on a report that the Securities and Exchange Commission is investigating the company before recovering again to trade up 4 percent at $39.85.

Ackman's announcement of his short position last month, which was roughly a year in the making, pushed the share price down 21 percent in two days. It also helped rescue his fund's otherwise tepid returns, leaving investors with a gain of 12 percent for 2012, twice as much as the average hedge fund.

On Wednesday, Ackman, who already vowed to donate any profits he made off the investment to charity, tried to take a more modest tone by saying his research was simply designed to help others understand Herbalife better.

"The outcome of this investment is not about Pershing Square or anyone else who is long or short the stock," Ackman said in a statement. "To the extent another investor, long or short, brings additional sunlight to the situation, we welcome them."

Meanwhile Loeb, who delivered even stronger returns than Ackman with a 21 percent gain in his Third Point Offshore fund and a 33.6 percent rise in his Third Point Ultra fund, has company in betting that Herbalife stock will rise.

"The stock declined by nearly half last month following controversial assertions made by a short seller about Herbalife's business model and practices," Loeb wrote, adding "Third Point has a different view and holds about 8 percent of Herbalife outstanding common stock, which we acquired mostly during the panicked selling that followed the short seller's dramatic claims." The short seller is Ackman whom he does not identify.

As a fast-growing company, Herbalife is already a mainstay in many investment firms' index funds. Also, East Side Capital, a highly respected New York-based hedge fund which has long managed money for George Soros, is another very large investor in Herbalife, regulatory filings show.

Robert Chapman, who founded Chapman Capital, said last week in a blog post that he took a "monster" bet that Herbalife shares will climb, arguing that Ackman's quest to see Herbalife's stock price go to zero depends heavily on the Federal Trade Commission's becoming involved in the matter.

The agency has defined a pyramid scheme as one where a company "promises consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public."

Ackman is not alone in his quest, either. A person familiar with hedge fund Kynikos Associates said short seller Jim Chanos is believed to have been shorting Herbalife shares for a while.

(Reporting by Svea Herbst-Bayliss in Boston, additional reporting by Ben Berkowitz; Editing by John Wallace, Matthew Lewis and Andrea Ricci)