Hindenburg Research was widely recognized as a top performer in the world of activist short selling.
That’s why its abrupt shutdown last week sent ripples across an industry where exposing corporate fraud and misconduct has become one of the riskiest, burdensome and loathsome corners of Wall Street.
Founder Nate Anderson didn’t give a specific reason when he announced the closure of his company, which rose to fame in 2020 with the short call from electric car startup Nikola (NKLA). Since then, his targets have included the Indian conglomerate Adaniwhich owns the conglomerate Icahn Enterprises (IEP), and most recently the server manufacturer Super Micro Computer (SMCI).
“So why disband now? There’s no one specific thing – no particular threat, no health problem and no big personal problem.” wrote Anderson on his company’s website. He credited Hindenburg’s work with playing a role in nearly 100 people being charged civilly or criminally, “including billionaires and oligarchs.”
But some industry watchers aren’t entirely surprised to see the iconic short seller close up shop a little more than a year after Jim Chanos, famous for playing against Enron in 2001, also threw in the towel.
“It’s a very tough business, not just because markets tear and are built to go up, but it puts a lot of wear and tear on you,” Carson Block, founder and chief investment officer at Muddy Waters Capital, told Yahoo Finance.
In short, the business of short selling in public has become increasingly scrutinized, litigated and costly.
“Every year the bar for finding ‘stories,’ for lack of a better word, that investors would care about gets higher,” explained Block. “There’s just more complacency built in because basically all this easy money numbed investors to risk.”
Short sellers borrow shares in a company that they believe will fall in value and sell them. When 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 further: They make a living by publishing reports alleging fraud or other wrongdoing at a company—and win when the stock falls. Industry insiders say their research may include information from hedge funds that want to avoid recognition.
Depending on the structure of a deal, the research may be shared free of charge with the short-selling firm. Agreements may include shared profits or payment for legal fees if the target company sues.
Although hedge funds tend to use short selling as “insurance” to reduce exposure to a market decline or correction, the practice of revealing overvaluation or fraud has not been widely appreciated by most investors in a bull market, said Drayton D’Silva . CEO and Head of Investment at Capital of Tower Hill.
“There is this — mainly hostility and anger toward short sellers because the average person is typically always long,” D’Silva said.
“Yes (short selling) it destroys value, but that value was always false,” he added.
Moving on: Nate Anderson of Hindenburg Research in New York, New York. (Bonnie Jo Mount/The Washington Post via Getty Images) ·Washington Post via Getty Images
The epic retail investor-led short squeeze of video game retailer GameStop (GME) in 2021 that 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 led to greater scrutiny of the business of targeting overvalued stocks.
“There was more public attention on short selling. And because there was more public attention on short selling, I think that drove policy and regulatory interest,” said Dan Taylor, a professor at the University of Pennsylvania Wharton School.
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 followers by publishing false and misleading statements related to stock trading recommendations.”
In an interview with CNBC earlier this monthVenstre said, “I’ve never been accused by the SEC or the DOJ of ever lying about a company. That’s the most important thing. I tell the truth about companies.”
Also in early January Securities and Exchange Commission implemented new information requirements with the aim of creating more transparency around funds’ short-selling practices. The rules require reporting to the SEC daily short positions of at least $10 million. The agency will publish total daily activity within approximately 30 days of the end of each calendar month.
Taylor believes that such rules are “too harsh”.
“Why are we focusing here on exposing short positions at the daily level, as opposed to both 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
Barring tough rules, activists may be in the midst of a self-imposed hiatus.
“I think there’s a cyclical component here and we’re coming out of a period that’s been really tough for activist short sellers,” said Block of Muddy Waters Capital, though he pointed out that 2021 turned out to be a good year for activists. short selling.
Hindenburg’s closure comes as the number of prominent players has declined in recent years. Breaking pointa data analytics tracking site listed 42 active short-selling firms last year, down from 62 in 2020.
Yet the timing of the Hindenburg’s dissolution remains a mystery.
Among the top activists, Hindenburg has consistently ranked as a high performer, holding the No. 1 position in 2024 based on the number of published reports, according to Breakout Point data.
“He basically goes out on top,” Block said. “Most people, when they get out of short selling, it’s after they’ve experienced a reversal of fortune. So Nate is ahead of the curve on that one.”
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
Click here for an in-depth analysis of the latest stock market news and events that move stock prices
Read the latest financial and business news from Yahoo Finance
Skip to content
