Hindenburg Research was widely recognized as one of the best in the world of short-selling activists.
That’s why its abrupt shutdown last week sent ripples through an industry where pointing out fraud and corporate misconduct has become one of the riskiest, onerous and most loathed corners of Wall Street.
Founder Nate Anderson didn’t give any specific reason when he announced the closure of his company, which rose to prominence in 2020 with the brief call of electric vehicle startup Nikola (NKLA). Since then, its targets have included Indian conglomerate Adani, conglomerate Icahn Enterprises (IEP) and, most recently, server maker Super Micro Computer (SMCI).
“So why disband now? There is nothing specific: no particular threat, no health issue, no major personal issue,” Anderson wrote on his company site. He credited Hindenburg’s work with playing a role in nearly 100 people being civilly or criminally charged, “including billionaires and oligarchs.”
But some industry observers aren’t entirely surprised to see the iconic short seller go out of business just over a year after Jim Chanos, famous for betting against Enron in 2001, also threw in the towel.
“It’s a very difficult business, not only because markets are torn and made to go up, but it also wears you down a lot,” Carson Block, founder and chief investment officer of Muddy Waters Capital, told Yahoo Finance.
Simply put, the business of public short selling has become increasingly scrutinized, litigious, and expensive.
“Every year, the bar for finding ‘stories,’ for lack of a better word, that interests investors is raised,” Block explained. “There’s just more built-in complacency because basically all this easy money was anesthetizing investors into taking risks.”
Short sellers borrow shares of a company that they believe will lose value and sell them. Once the stock price drops, they buy it back and return it to the lender, making a downside profit. Activist short sellers go further: They make a living by publishing reports alleging fraud or other misconduct at a company, and they profit when its stock falls. Industry insiders say their investigation may include information from hedge funds seeking to avoid recognition.
Depending on the structure of a deal, the research may be shared for free with the short selling company. The agreements may include profit sharing or payment of legal fees in case the target company files a lawsuit.
Although hedge funds tend to use short selling as “insurance” to reduce exposure against a market crash or correction, the practice of exposing overvaluation or fraud has not been widely appreciated by most investors in a bull market, Drayton D’Silva said. CEO and Chief Investment Officer of Tower Hills Capital.
“There’s this: essentially animosity and resentment toward short sellers because typically the average person is always long,” D’Silva said.
“Yeah [short selling] “It destroys value, but that value was always false,” he added.
Continuing: Nate Anderson of Hindenburg Research in New York, New York. (Bonnie Jo Mount/The Washington Post via Getty Images) ·The Washington Post via Getty Images
The epic short squeeze led by retail investors of video game retailer GameStop (GME) in 2021, which resulted in billions of dollars in losses for former hedge fund Melvin Capital, put the spotlight, at least in recent years, on the practice of short selling. The meme frenzy that followed sparked greater scrutiny of the business of targeting overvalued stocks.
“There was increased public attention to short selling. And because there was increased public attention to short selling, I think that drove political and regulatory interest,” said Dan Taylor, a professor of the Wharton School of the University of Pennsylvania.
Enter the Securities and Exchange Commission.
Last year, the SEC announced charges against activist short seller Andrew Left and Citron Capital, in what regulators described “as a $20 million, multi-year scheme to defraud his followers by publishing false and misleading statements related to with stock trading recommendations.”
In an interview with CNBC earlier this month, Left said, “I have never been accused by the SEC or the DOJ of lying about a company. That’s the key. I tell the truth about companies.”
Additionally, in early January, the Securities and Exchange Commission implemented new disclosure requirements aimed at providing more transparency about funds’ short-selling practices. The rules require reporting daily short positions of at least $10 million to the SEC. The agency will publish the daily activity aggregate within approximately 30 days after the end of each calendar month.
Taylor believes those rules are “too strict.”
“Why are we focusing here on revealing short positions at the daily level, rather than short and long positions at the daily level,” Taylor said. “It’s not that one type of position is necessarily more manipulative or more suspicious.”
Exposing Enron: Jim Chanos, founder and managing partner of Kynikos Associates in 2013. (REUTERS/Mike Segar) ·REUTERS / Reuters
Strict rules aside, activists may be in the midst of a self-imposed pause.
“I think there’s a cyclical component here, and we’re coming out of a period that’s been really difficult for activist short sellers,” said Muddy Waters Capital’s Block, although he noted that 2021 turned out to be a good year to summarize. sale.
Hindenburg’s closure comes as the number of top players has dwindled in recent years. Breakout Point, a data analytics tracking site, listed 42 active short seller companies last year, up from 62 in 2020.
Still, the timing of Hindenburg’s dissolution remains an enigma.
Among top activists, Hindenburg has consistently ranked as a high performer, ranking number one in 2024 based on the number of reports published, according to data from Breakout Point.
“He’s basically going to come out on top,” Block said. “Most people, when they get out of short selling, it’s after they’ve experienced a change in fortune. So Nate is ahead of the curve in that regard.”
Inés Ferré is a senior business reporter at Yahoo Finance. Follow her on X in @ines_ferre.
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