Hindenburg Research shut down highlights ‘wear and tear’ of activist short selling

On By Littum

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.