(News Bulletin 247) – The continued rise in stock markets has hit these short sellers hard in recent years, with some throwing in the towel.

Sometimes criticized for their allegations which may be erroneous, sometimes praised for revealing real frauds, short sellers rarely leave anyone indifferent.

As a reminder, these investors implement strategies that lead them to oppose companies or other market players, by betting not on the rise but on the fall of a security, without holding it. To do this, they borrow a share held on a dedicated market (the “repo”) for remuneration from the lender, and immediately sell it. They then buy back the stock (to return it to its original owner), hoping that it has fallen in the meantime (and they pocket the price difference).

This very risky strategy is reserved for financial professionals, and should be banned for individuals, for reasons that we mentioned in a previous article.

To support their positions and influence the market, some notorious short sellers, such as Muddy Waters, Gotham City Research or Shadowfall, sometimes publish analytical reports that are incriminating, even vitriolic.

Sometimes it happens. Very early on, Shadowfall – and also the Financial Times – had expressed doubts about the sincerity of the accounts of Wirecard, a payments group which had experienced dizzying growth and had become the rising star of the Frankfurt Stock Exchange. A few years later, Wirecard disappeared following gigantic accounting irregularities, causing a scandal which deeply tarnished the reputation of the German market.

Sometimes it doesn’t work. Or hardly. Vusiongroup was attacked by two “short sellers”, Gotham City Research in 2023 then by Shadowfall, a few weeks ago. But the company has strongly and largely denied the accusations. With some success so far, according to analysts. The company’s general manager, Thierry Gadou, has also called for a better evaluation of these short-selling funds “which harm shareholders but also real activist funds”. Shadowfall also attacked Eurofins in 2019, which did not prevent the medical analysis laboratory from joining the CAC 40 two years later.

Losses that can be significant

Necessarily disliked by their targets but also sometimes by regulators or other investors, short sellers, as a whole, suffer with the rise in the markets which makes their bets more difficult to hold. According to data from the company S3, short sellers suffered losses of $195 billion in 2023 in the Canadian and American markets. This despite winning bets on massacred values, such as the regional banks First Republic and SVB, or the Covid vaccine specialists (Moderna, Pfizer).

A landmark decision came last year. Jim Chanos, a famous short seller who notably led a successful campaign against Enron (which disappeared in 2021 following one of the most resounding financial scandals in history), has decided to close his funds or to transform them into family offices. “The most famous bear (an investor who bets on the downside, Editor’s note) on Wall Street is going into hibernation,” the Wall Street Journal wrote at the time. The daily then underlined that investors had less attraction for downward speculation.

Bloomberg didn’t beat around the bush in an (excellent) survey published last week, noting that “short sellers are in danger of extinction.” Assets under management of “short” funds increased from $7.8 billion to $4.6 billion according to HFR data, cited by Bloomberg. An index compiled by this same company went from 54 residents to just 14, showing the shrinking number of players in this market.

Furthermore, a report from the Acadian company last May highlights that it has become “incredibly” expensive to sell securities short on the market, with “rents” on borrowed securities which can reach annual rates of 100% on many titles or even 1,000% in some cases, which she explained she had not seen since… 1931.

A threatened species”

The Economist, for its part, warned last November that “discovered sellers are in danger, which is bad news for the market”. At the same time, the Financial Times wrote that short sellers are “misunderstood”, recalling that these market players often carry out “intense research” and thus shed light on major scandals.

According to a 2019 study by Antonis Kapartanis, a researcher at the University of Texas at Austin, 30% of fraud alleged by short-sellers is later confirmed. “Despite a high rate of unconfirmed allegations, activist short sellers still provide the strongest signal that a company has committed accounting fraud compared to other commonly used fraud indicators,” the study concluded.

Another potential virtue of these sellers: highlighting the exaggeration of certain upward movements and cleaning up the market. Which constitutes a counterbalance when it is much easier and more consensual to adopt positive opinions.

Regulators do not hesitate to tighten the screw, which can discourage these short sellers. China and South Korea took steps last year to restrict short selling. As Bloomberg recalls, many activist “short sellers” found themselves under investigation by the American authorities. While there have been no legal action, the US stock market watchdog, the SEC, has established rules requiring hedge funds and large investors to disclose their short selling positions at the end of each month.

“Short sellers”, in the United States at least, have also had to fight against the emergence of “meme stocks”, with individual investors who banded together on social networks to massively buy certain stocks (Gamestop is the ‘typical example of this phenomenon) and take the short sellers by surprise. Without the economic fundamentals of the company in question justifying their decisions.

“It’s a bad business,” Andrew Left, founder of Citron Research, who was involved in the investigation by US authorities, told Bloomberg. “You put yourself at the center of an ongoing lawsuit from the company, even from the government. And you ask yourself ‘why am I doing this?'” he added. And to confide to the agency: “We are a disappearing race”.