Hindenburg Research is widely recognized as a top performer in the world of activist short selling.
That’s why last week’s sudden shutdown of the company’s fraud and misconduct sent waves through an industry that has become one of the most dangerous, burdensome and hated corners of Wall Street.
Founder Nate Anderson In 2020, when he announced the closure of the company, famous for short calls, he did not give any specific reason. Electric vehicle startup Nikola (NKLA) Since then, his targets include Indian conglomerates AdaniIt includes conglomerate Icahn Enterprises (IEP) and, more recently, server maker Super Microcomputer (SMCI).
“Then why is it broken up now? There is nothing special – no special risk, no health problem and no big personal issue. He wrote Anderson on the company’s website. He credits Hindenburg’s career with playing a role in nearly 100 civil or criminal prosecutions of individuals “including billionaires and oligarchs.”
But some industry watchers
Carson Block, founder and chief investment officer of Muddy Waters Capital, told Yahoo Finance: “It’s a tough business, not only because the markets crash and they’re built to go up, but it also puts you through a lot of tears and tears.”
Simply put, the public short sale business has become increasingly scrutinized, litigious, and costly.
“Every year the bar for finding ‘stories,’ for lack of a better word, gets higher for investors to worry about,” Block explained. “Essentially, all this easy money has just created more complacency because they’ve been fooling investors into taking risks.”
Short sellers borrow shares of a company that they believe will go down in price. After the share price falls, they buy back the shares and return them to the lender, making a profit on the downside. Activist short sellers go even further: They make a living by publishing reports of fraud or other wrongdoing in a company — and watch the stock fall. Experts in the field say their research may include information from hedge funds seeking to avoid accreditation.
Depending on the structure of the deal, the research may be shared with the short-selling firm for free. Agreements may include joint profits or payment for legal fees if the target company is sued.
Although hedge funds tend to use short selling as “insurance” to reduce exposure to a market crash or correction, the practice of exposing overvaluation or fraud is not appreciated by most bull market investors, said Drayton D’Silva. Chief Executive Officer and Chief Investment Officer at Tower Hills Capital.
“It’s—mainly, there’s animosity and resentment toward short sellers because typically the average person is always long,” De Silva said.
“Yes (short selling) destroys value, but that value has always been false,” he added.
In Progress: Hindenburg Research Nate Anderson in New York, NY. (Bonnie Jo Mount/Washington Post via Getty Images) ·Washington Post via Getty Images
The 2021 bankruptcy of former hedge fund Melvin Capital led to the billion-dollar loss of the iconic retail investor, leading short squeeze Video Game Stop (GME) has focused on the short-selling practice at least in recent years. The ensuing meme frenzy led to further scrutiny of targeting overvalued stocks.
“There’s been a lot of public attention for short selling. And because there’s been a lot of public attention for short selling, I think that’s driven political and regulatory interest,” said Dan Taylor, a professor at Pennsylvania’s Wahton School.
Enter Securities and Exchange Commission.
Last year The SEC announced the charges Regulators linked to activist short-seller Andrew Gra and Citron Capital described it as “a $20 million, multi-year scheme to defraud followers by publishing false and misleading statements related to stock trading recommendations.”
In an interview with CNBC earlier this month“I’ve never been accused by the SEC or the DOJ of lying about a company. That’s the bottom line. I tell the truth about companies.”
Also, in early January, the Securities and Exchange Commission Implemented new disclosure requirements Intended to bring greater transparency about fund short selling practices. The rules require reporting to the SEC daily short positions of at least $10 million. The agency publishes daily activity totals within 30 days of the end of each calendar month.
Taylor believes that such laws are “too harsh”.
“That’s why we focus on defining short positions as opposed to both short and long positions on a daily basis,” Taylor said. “The same position is not necessarily more malicious or more suspicious.”
Exposing Enron: Jim Chanos, founder and managing partner of Kynikos Associates in 2013. (Reuters/Mike Segar) ·REUTERS / Reuters
Stricter laws aside, activists can be in the middle of a stand on their own.
“I think there’s a cyclical element here and we’re coming out of a very tough period for activist short sellers,” said Moody’s Water Capital Block, although he suggested 2021 would be a good year for shorting. sell.
Hindenburg’s closure comes as the number of popular players has dwindled in recent years. The point of separationThe data analytics tracker listed 42 active short-selling firms last year, down from 62 in 2020.
However, the timing of the Hindenburg’s demolition remains a mystery.
Among the top activists, the Hindenburg has been a top performer, holding the No. 1 slot in 2024 in consistently published reports, according to Breakout Point data.
“It basically goes up,” Block said. “When most people go short selling, it’s after they’ve experienced a reversal of fortune. So Nettie is ahead of the curve on that one.”
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X @ines_ferre.
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