Hindenburg Research is widely considered the top performer in the aggressive short selling space.
That's why its sudden closure last week sent ripples across the industry, calling out corporate fraud and misconduct in what has become one of the most dangerous, burdensome and unsavory corners of Wall Street.
Founder Nate Anderson gave no specific reason when announcing the closure of the company, which rose to prominence in 2020 with a brief outing from electric vehicle startup Nikola (NKLA). His targets have since included Indian conglomerate Adani, holding group Icahn Enterprises (IEP) and, most recently, server maker SMCI.
"So why disband now? There was no one specific incident - no particular threat, no health concerns, no major personal issues," Anderson wrote on his company website. He praised Hindenburg for his role in bringing civil or criminal charges against nearly 100 individuals, including billionaires and oligarchs.
But some industry observers weren't entirely surprised to see the iconic short seller close its doors more than a year after Jim Chanos, best known for his 2001 bet on Enron, also threw in the towel .
“This is a very tough business, not only because the market is going to tear up and is bound to go up, but also because the market is going to tear up and it’s bound to go up,” Carson Block, founder and chief investment officer of Muddy Waters Capital, told Yahoo Finance. It will cause a lot of wear and tear on you.”
In short, public short selling has become increasingly scrutinized, litigious and costly.
"Every year, the bar for finding a 'story' that investors care about, for lack of a better term, gets raised," Block explains. "People are more complacent because basically all this easy money is narcotizing investors to take risks."
Short sellers borrow shares of companies that they believe will fall in value and sell them. Once the stock price falls, they buy back the stock and return it to the lender, making a profit on the decline. Aggressive short sellers go even further: They make a living by publishing reports alleging fraud or other wrongdoing at companies and profiting when their stock prices fall. Industry insiders say their research may include information from hedge funds to avoid being endorsed.
Depending on how the deal is structured, the research may be shared with the short-selling firm at no charge. The agreement can include sharing profits or paying legal fees if the target company files suit.
Drayton DeSilva said that while hedge funds tend to use short selling as "insurance" to reduce the risk of a market decline or correction, the practice of exposing overvaluation or fraud has not been as popular in bull markets. Widely recognized by most investors. Chief Executive Officer and Chief Investment Officer of Tower Hills Capital.
"It's essentially animosity and resentment toward short sellers because the average person is always long," DeSilva said.
"Yes (short selling) it does destroy value, but the value is always fake," he added.
A massive retail investor-led short squeeze in 2021 on video game retailer GameStop (GME) that cost former hedge fund Melvin Capital billions of dollars has put short selling in the spotlight, at least in recent years. in this way. The ensuing meme frenzy has prompted greater scrutiny of the business targeting overvalued stocks.
"The public is paying more attention to short selling," said Dan Taylor, a professor at the University of Pennsylvania's Wharton School. "I think because of the increased public attention to short selling, that's driving interest from politicians and regulators."
Enter the Securities and Exchange Commission.
Last year, the U.S. Securities and Exchange Commission (SEC) announced charges against activist short sellers Andrew Left and Citron Capital in what the regulator described as “a multi-year scheme worth $20 million. "Deceive followers by publishing false and misleading statements related to stock trading advice."
"I've never been accused by the SEC or the Department of Justice of lying about the company," Left told CNBC earlier this month. "That's the key. I told the truth about the company."
Additionally, in early January, the U.S. Securities and Exchange Commission implemented new disclosure requirements aimed at increasing transparency around funds’ short-selling practices. The rule requires daily short positions of at least $10 million to be reported to the SEC. The agency will publish daily activity totals approximately 30 days after the end of each calendar month.
Taylor believes such rules are "too harsh."
"Why do we focus on disclosing daily short positions rather than daily short and long positions," Taylor said. "It's not that a certain position is necessarily more manipulative or more suspicious."
Strict rules aside, activists may be in the midst of a self-imposed pause.
“I think there’s a cyclical element here and we’re coming out of a very tough period for activist short sellers,” Muddy Waters Capital’s Bullock said, although he noted that 2021 will be a good year for activist short sellers. Short selling at the beginning of the year.
Hindenburg's closure comes as the number of notable players has declined in recent years. Data analytics tracking website Breakout Point listed 42 active short-selling firms last year, down from 62 in 2020.
Even so, the timing of Hindenburg's dissolution remains a mystery.
Among top activists, Hindenburg has consistently performed well, ranking No. 1 in 2024 based on the number of reports published, according to Breakout Point.
"He's basically in the lead," Bullock said. "Most people don't give up on short selling until they experience a reversal of fortune. So Nate was ahead of the curve on that."
Ines Ferre is a senior business reporter at Yahoo Finance. Follow her on X: @ines_ferre.
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