Hindenburg Research was widely recognized as one of the top performers in the world of activist short selling.
That's why shut it down suddenly last week sent waves across an industry where exposing fraud and corporate misconduct has become one of the most dangerous, burdensome and nasty corners of Wall Street.
Founder Nate Anderson gave no specific reason when he announced the closure of his company, which rose to fame in 2020 with a brief call of starting Nikola's electric vehicle (NKLA). Since then, his targets have included an Indian conglomerate Adaniholding conglomerate Icahn Enterprises (CLOSE), and most recently, server maker Super Micro Computer (SMCI).
“So why break up now? There is no one specific thing – no specific threat, no health issue, and no major personal issue,” he wrote Anderson on his company's site. He credited Hindenburg's work with playing a role in nearly 100 individuals who were 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 just over a year after Jim Chanos, who famously bet against Enron in 2001 also throw in the towel.
“It's a very difficult business not only 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 of Muddy Waters Capital told Yahoo Finance.
Simply put, the business of public short selling has become increasingly scrutinized, litigious and costly.
“Every year the bar to find 'stories,' for lack of a better word, that investors would care about gets higher,” explained Block. “There's more complacency built in because basically all this easy money was anesthetizing investors to risk.”
Short sellers borrow shares of a company that they believe will fall in value and sell them. Once the stock price falls, they buy back the shares and return them to the lender, making a profit on the downside. Active short sellers go further: They make a living by publishing reports alleging fraud or other misconduct at a company – and profit when its stock falls. Industry insiders say their research could include information from hedge funds trying to avoid recognition.
Depending on the structure of the deal, the research may be shared for free with the short sale company. Agreements may include shared profits or payment for legal fees in case the target company sues.
Although hedge funds tend to use short selling as “insurance” to reduce exposure against a market drawdown or correction, the practice of exposing overvaluation or fraud has not been widely appreciated by most investors in a bull market, said Drayton D'Silva, CEO and chief investment officer at The capital of Tower Hills.
“There's this — basically hostility and anger toward short sellers because typically the average person always goes 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) ·The Washington Post via Getty Images
The epic investor-led short squeeze of video game retailer GameStop (GME) in 2021 that resulted in billions of dollars in losses from the old hedge fund, Melvin Capital put the focus, at least in recent years, on the practice of short selling. The ensuing meme frenzy prompted increased scrutiny of the business of targeting oversold stocks.
“There was more public attention to short selling. And because there was more public attention to short selling, I think that stimulated politician and regulatory interest,” said Dan Taylor, a professor at the University of Pennsylvania's 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 multi-year $20 million scheme to defraud followers by issuing false and misleading statements related to stock trading recommendations.”
In an interview with CNBC earlier this monthLeft said, “I've never been accused by the SEC or the DOJ of ever lying about a company. That's the key thing. I tell the truth about companies.”
Also, in early January the Securities and Exchange Commission implement new disclosure requirements with the intention of bringing more transparency about the short selling practices of funds. The rules require reporting to the SEC daily short positions of at least $10 million. The agency will publish the total daily activity within approximately 30 days after the end of each calendar month.
Taylor believes that such rules are “too difficult.”
“Why we're focusing here on exposing 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 viewpoint is necessarily more manipulative or more suspicious.”
Unveiling Enron: Jim Chanos, Founder and Managing Partner of Kynikos Associates in 2013. (REUTERS/Mike Segar) ·REUTERS / Reuters
Strict rules aside, operators may be in the middle of a self-imposed pause.
“I think there is a cyclical element here, and we are coming out of a period that has been very difficult for active short sellers,” said Block of Muddy Waters Capital, although he noted that 2021 has been a good year in short. sell.
Hindenburg's closure comes as the number of prominent players has declined in recent years. Place of Withdrawaldata analytics tracking site listed 42 active short seller firms last year, down from 62 in 2020.
However, the timing of Hindenburg's demobilization remains an enigma.
Among top executives, Hindenburg has consistently ranked as a high performer, holding the No. 1 slot in 2024 based on the number of published reports, according to Breakout Point data.
“It basically goes out on top,” Block said. “When they let most people sell short, it's after they experience a reversal of fortune. So Nate is ahead on that one.”
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X in @ines_ferre.
