Short sellers face 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 them to bet against public values.

They survived this attack and many other attacks during the following centuries. But the rise of GameStop could mark the end of an era for the short public: long-discredited people who try to sweep away business crimes, take positions betting on a fall in stocks and then run public campaigns .

The biggest victim occurred on Friday, when Citron Research, of Andrew Left, said it would stop offering short-term sales analysis after 20 years of providing the service. Others already adopt less aggressive tactics or evolve into different shapes and forms. Melvin Capital was forced to retire by throwing his short position at GameStop, Carson Block and others reduce your bets and some of the most powerful hedge funds are nursing double-digit losses and exploring your next steps.

Few ahead Main street or in the corporate United States, which sees short sellers as detestable vultures with dubious practices, of course, are shedding many tears. However, some investors, who say that shorts serve to monitor markets, could be. Time and time again, short sellers, who practice the risky art of selling borrowed shares to repurchase them at lower prices, have been seen as a critical antidote to sniffing out fraudulent companies, those with accounting and business plans. questionable, or simply to keep valuations under control. Enron is the most notable example.

“I’m still working, so today 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 most fundamental problem, he said, is that fewer and fewer companies are spending significant money on research companies or, as the case may be, “identifying predatory or fraudulent companies”.

Even before the attack on Reddit’s Wallstreetbets forum, where a crowd of 6 million people came together to shoot the actions most hated by hedge fund elites, the short sale was tough enough. The vast majority of shorts were already irrelevant, thanks to the popularity of index funds and the longest bullish market in history.

Their number has been declining for some time. Of the thousands of $ 3.6 trillion industry hedge funds, only about 120 specialize primarily in equity betting. And they have seen combined assets fall 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 conduct a bank raid,” 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 mob started their attack that we haven’t seen in 15 years.”

A fighting art

Short sellers are under pressure amid rising markets

Source: Eurekahedge

Some of the most feared short sellers are looking for coverage. Block, whose forensic investigation notes have caused precipitous falls in several companies, yes “Massively” cut his short bets. A $ 1.5 billion hedge fund based in London, with one of the best short-term sales records, even refused to be named in this story for fears of being pursued by retail investors. Another has assigned an employee to browse the wallstreetbets page to look for signs of brewing riots while revaluing their bets.

Read more: Reddit Crowd Bludgeons Melvin Capital on Industry Warning

Short film salesman Gabriel Grego, founder of Quintessential Capital Management, said he is taking bearish pauses in the United States, though he believes “short selling is alive and well,” he said it’s time to be cautious. GameStop’s rebellion shows that retail investors are now aware of their power and that will not go away, he added.

Hated but necessary

The shorts have repeatedly faced these sieges in their 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 reduce the shares of the Dutch East India Company. A year later, the company convinced the Dutch government to ban the short-term sale, saying people like Le Maire were harming innocent shareholders, including “widows and orphans.”

Napoleon banned the practice 200 years later and during the Wall Street crash in 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-term sale of financial shares. Many other countries followed. More recently, billionaire Elon Musk has gone on social media making short sales shots, calling them a scam.

But, according to the most favorable view, the shorts are considered the last Wall Street police, devoting countless hours to the work of detectives and forensics, taking on powerful companies and regulators, and exposing themselves to potentially unlimited losses. Proponents argue that in a world where the traditional securities research industry has not had the backbone to put selling recommendations to troubled companies and that passive investment plays an even bigger role, Le Maire’s descendants are much needed.

Take for example the Enron accounting scandal. Jim Chanos, the founder of hedge fund Kynikos Associates, helped expose the fraud and surpassed its $ 79.14 per share drop on average in 2000 until December 2001, when it dropped to 60 cents. And just last year, German regulators praised short-term sellers after initially banning them from exposing Wirecard AG, which filed for insolvency proceedings after revealing that € 1.9 billion (€ 2.3 billion) was missing. of dollars).

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

New rulebook

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

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

At the moment, hedge funds that are tactically betting on companies to make short-term profits have the highest risk for their survival. They are expected to be selective, avoid crowded businesses, borrow less, and stay away from companies with strong retail investor participation. Most importantly, they can retire if necessary.

Peter Borish, Quad Group’s chief strategist, predicts lower returns for these funds, as they shun the direct lack of securities at lower prices and make profits faster. “If you’re looking for a short-term vendor to reach the premises, you’re more likely to get singles and doubles,” he said of the new prospect.

Other funds may choose to use discreet over-the-counter options to make short bets, as they do not need to be disclosed in regulatory applications. Melvin Capital’s short films listed in his public archives helped make them a Reddit brother’s target.