Short sellers are facing the end of an era like Rookies Rule Wall Street

Photographer: Spencer Platt / Getty Images

The latest assault on Wall Street short sellers has a long tradition, dating back at least to Napoleon. “Traitor,” he called on them to bet on government bonds.

They survived that and many other attacks over the next few centuries. But the GameStop uprising could mark the end of an era for public shorts – people who are offended by trying to eliminate corporate wrongdoing, take positions that bet that an action will fall, and then run public campaigns.

The biggest victim came on Friday, when Andrew Left’s Citron Research said it would stop offering short selling analysis 20 years after the service was provided. Others are already adopting less aggressive tactics or evolving into different shapes and forms. Melvin Capital was forced to withdraw, throwing short position on GameStop, Carson Block and others reduce bets, and some of the strongest hedge funds are healthcare double-digit losses and exploring the next steps.

A few more Main Street or in corporate America, which sees short sellers as detestable eagles with dubious practices, sheds many tears, of course. However, some investors, who say that shorts serve the police of the markets, could be. Countless times, short sellers, who practice the risky art of selling borrowed shares to buy them back at lower prices, have been seen as a critical antidote to sniffing out fraudulent companies, those with dubious accounting and business plans, or just to keep evaluations under control. Enron is the most notable example.

“I’m still in business, so nowadays I think it’s good enough,” said Fahmi Quadir, a short saleswoman best known for her successful bet against Valeant Pharmaceuticals and founder of New York hedge fund Safkhet Capital. The fundamental problem, she said, is that fewer and fewer companies are spending substantial money on research companies or, in her case, “identifying businesses that are predatory or fraudulent.”

Even before the attack on Reddit’s Walldreetbets forum, where a powerful crowd of 6 million joined forces to launch the worst actions of hedge fund elites, short selling was heavy enough. The vast majority of shorts were already irrelevant, due to the popularity of indexed funds and the longest-running bull market in history.

Their number has been declining for some time. Of the thousands of $ 3.6 trillion hedge funds in the industry, only about 120 specialize in betting largely against stocks. And they have seen combined assets cut by more than half to just $ 9.6 billion in the last two years alone, according to data compiled by Eurekahedge.

“It’s like watching the police raid a bank,” said Crispin Odey, one of the world’s most bearish hedge fund managers. “There were already fewer short positions in the market before the Reddit mafia started the attack than we’ve seen in 15 years.”

An art that struggles

Short sellers are under pressure amid growing markets

Source: Eurekahedge

Some of the most feared sellers are soon coming out for coverage. Block, whose forensic research notes caused sharp declines in several companies, made it “Massive” cut his short bets. A $ 1.5 billion hedge fund based in London, with one of the best missing sales records, has refused to be named in this story about fears of being pursued by retail investors. Another appointed an employee to browse the wallstreetbets page for signs of beer riots as he reevaluated his bets.

Read more: Reddit Crowd Bludgeons Melvin Capital in warning for industry

Short film salesman Gabriel Grego, founder of Quintessential Capital Management, said he was interrupting rising bets in the United States. While he believed that “missing sales are alive and well,” he said it was time for caution. The GameStop rebellion shows that retail investors are now aware of their strength and will not disappear, he added.

Ugly, but necessary

Shorts have faced such sieges several times in the more than four centuries of existence. The first such trade is said to have taken place in 1609, when the Flemish merchant Isaac Le Maire tried to shorten the shares of the Dutch East India Company. A year later, the company persuaded the Dutch government to outlaw missing sales, saying Le Maire was harming innocent shareholders, including “widows and orphans.”

Napoleon banned the practice 200 years later, and during the Wall Street crash of 1929, short salesman Ben Smith hired bodyguards because of threats from angry investors. When the financial crisis intensified in 2008, US regulators restricted the short sale of financial stocks. Many other countries followed. More recently, billionaire Elon Musk took to social media with short sales, calling them fraud.

But in a more favorable perspective, shorts are seen as Wall Street cops, devoting countless hours to detective and forensic work, taking over strong companies and regulators, and exposing themselves to potentially unlimited losses. Proponents say that in a world where the traditional stock research industry has not had the backbone to make selling recommendations to distressed companies, and because passive investment plays an even bigger role, Le Maire’s descendants are in dire need. .

Take Enron’s accounting scandal, for example. Jim Chanos, the founder of the Kynikos Associates hedge fund, helped expose the fraud and fell from an average of $ 79.14 per share in 2000 to December 2001, when it plummeted to 60 cents. And since last year, German regulators have praised the missing sellers after initially banning them for the exposure of Wirecard AG, which filed for insolvency after revealing that 1.9 billion euros are missing (2.3 billion). billion dollars).

Read more: Wirecard It is added to the list of victories of short sellers in Europe

The new rulebook

Other observers are less sympathetic. Prior to the 2008 financial crisis, US regulators amended certain rules to facilitate short-circuiting, according to Brian Barish, investment director at Cambiar Investors. Some hedge funds have used it as a tool to brutalize companies that were viable but needed capital. Preventable insolvencies followed and real people were injured, Barish said.

“I don’t think hedge funds need help,” Barish said. “Let them taste their own medicine.”

For now, hedge funds that place tactical bets against companies for short-term profits face the greatest risk to their survival. They are expected to be selective, avoid crowded transactions, borrow less and stay away from companies with heavy retail investor participation. Most importantly, they can withdraw if necessary.

Peter Borish, chief strategist at Quad Group, predicts lower returns for such funds, as they avoid the direct absence of shares at lower prices and take profits faster. “If you’re looking for a short seller to hit home, you’re more likely to get single and double,” he said of the new prospects.

Other funds may opt for the use of discrete put-over-the-counter put options to place short bets, as they do not have to be disclosed in regulatory documents. Melvin Capital’s short films listed in their public documents helped them become a Reddit brother target.