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People go to Miami for a lot of reasons including winter sun, Cuban food, retirement. But Bloomberg’s Denitsa Tsekova recently traveled to South Florida for something a little different: Hedge Fund Week. There, she discovered something truly shocking: some of the biggest, boldest short-sellers are abandoning their strategy.
On today’s Big Take podcast, host David Gura speaks to Denitsa about why the rise of meme stocks, a bull market, and increasing regulatory scrutiny are leading some leading investors like Jim Chanos to abandon the strategy that made them famous. And she explains why the demise of these often-reviled investors isn’t necessarily a good thing.Read more: Short Sellers in Danger of Extinction After Crushing Stock Gains
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Here is a lightly edited transcript of the conversation:
David Gura: People go to Miami for a lot of reasons: winter sun, Cuban food, retirement. But Bloomberg’s Denitsa Tsekova recently traveled to South Florida … for something a little bit different.
Denitsa Tsekova: So, I went to a conference in Miami, which is one of the biggest hedge fund conferences, it's Hedge Fund Week.
Gura: Hedge Fund Week is a can’t-miss event for a select group of investors, who manage billions of dollars. Looking at the agenda, there’s a lot of what you might expect … at a gathering of hedge fund managers on Biscayne Bay: A “yacht brunch,” followed by a “yacht lunch,” and then, you guessed it, a “yacht co*cktail hour.”
Tsekova: And there were many panels with many big names. And one of the most exciting panels was getting together a lot of the investors who were featured in “The Big Short” — obviously, probably the most emblematic movie for short sellers.
Gura: “The Big Short.” That's the film the director Adam McKay made, based on the Michael Lewis book of the same name. It’s about a group of investors, including Steve Eisman. They bet against the early 2000s housing bubble, and made a killing … as the rest of the world was plunged into the Great Recession.
Tsekova: The expectation of the panel was the next Big Short. It was just like, what have you been doing? What are you looking at? What is the next big thing that is going to break? And I also came into that panel with the expectation of, “Wow, I'm going to, like, I'm going to break news about Steve Eisman announcing a short.”
Gura: Denitsa settled in — sadly, it was not a “yacht” panel. It was just in a cramped room with beige wallpaper and slat blinds. In other words, the perfect place to break some news.
Tsekova: And then we went in into the panel and a lot of them were like, well, we're not really shorting many things. Like Steve Eisman said, “I'm actually more of a long-oriented investor now. And I'm happier. I'm blissful. I have more time with my family.”
Gura: Spending time with his family? Bliss? Going long?! This was not what she expected Steve Eisman to say. He made his name as a short investor. And the surprises kept coming, as Denitsa started talking to some of Eisman’s rivals — to other short sellers. She called up Andrew Left, one of the world's best known short sellers, and he told her … short sellers like him are “a dying breed.” Now, short sellers have never been, uh, beloved on Wall Street.
Tsekova: We had the former New York stock exchange head, describing them as “un-American” and “icky.”
Gura: But don’t go cheering their demise just yet. Today on the show: Is this the end of the line … for short sellers? I’m David Gura, and this is The Big Take, from Bloomberg News.
Gura: Before we jump in, let’s start with the basics — with what short-selling is:
Tsekova: Yeah. In simple terms, shorts would be the opposite of going long.
Gura: All right, let me tease that out a little bit more. When an investor goes long... it's because he has reason to believe the price of a security... whether it's a stock, a bond or some other asset... is likely to go up. He’s betting on that. When an investor goes short, he’s betting that a business — or an asset — is overvalued, and its price is going to go down. And Bloomberg’s Denitsa Tsekova says …this has been going on … for hundreds of years.
Tsekova: It's actually a practice that's nothing new. It's been around for a very long time., and it's something that's always been heavily scrutinized. The way it has played out is eventually there is a market crash, and the easy people to blame have been short sellers. Even Napoleon himself has famously said they're an enemy of the state, as they add more volatility and then it's harder for him to finance his war. So this has been a theme for hundreds of years.Gura: So they don't generally have a great reputation.
Tsekova: They don't have a good reputation. Yes.
Gura: To be a short seller means you’re essentially betting on the price of an asset … falling, or going down. There are a lot of ways you can do this … but the main way big investors do it is by borrowing shares in a company, selling them at a high price, then hopefully buying them back at a lower price before returning them. But there’s a key difference between going long and going short.
Tsekova: The big difference with long is, if you buy something long, obviously your losses are capped.
Gura: You can bet that a company’s share price will rise. But if you’re wrong, well, there’s a limit on how much money you’d lose if it were to fall. Stock prices can’t go below zero. But if you bet that a company’s stock will fall, and it goes up instead?
Tsekova: The downside is unlimited. So, obviously a really tough place to be in.
Gura: So there’s a lot of risk. But the upside can be big. If a company’s stock goes down, loses value, goes bankrupt… when nobody else thought it would, you can make a lot of money. But — and there is a but here — the situation that made you a lot of money… is likely to be very bad for the business you’ve bet against… and for anyone who’s invested in it.
Tsekova: If you think about investing in general, the majority of the population hopes that stocks will go up. So we all invest our pensions, our brokerage accounts, and we hope the S&P reaches new highs. And then there is a group of people who comes out and releases a report and says, “Well, we actually hope this drops and like it drops 100% and the company crumbles and you know, it goes into bankruptcy.” So it's just like a very contrarian point to be in the first place. And it's, it's hard to be, to be going against the masses. It’s hard to be going against people who have put their pensions in the S&P 500. And it's hard to tell them that, you know, I've released a short report, so I hope this company goes into bankruptcy.
Gura: Betting on bankruptcy can be a bit unsavory. But Denitsa says short-sellers have played an essential role.
Tsekova: If we go back to academic literature, they're actually proven to be healthy for markets.
Gura: Hmm…
Tsekova: There are numerous papers showing that short selling activity has been shown to be a brake on bad corporate behavior. It has shown that it keeps the prices of companies with questionable finances in check. In theory, short sellers could come in and say, “Hey, this company's finances are really bad. It doesn't make sense for it to go up 200%. So let's short it.”
Gura: This is exactly what happened in the 2008 housing crisis. Banks and mortgage lenders were selling bad loans, everyone was buying, the markets were flying high. But a small number of investors…thought this was too good to be true, and decided to bet against them. Against everybody really. And when the housing market collapsed, it made those short-sellers seem like oracles. In a market steeped in deception, they were brave enough to see things clearly, and they won. Big. And in the wake of the housing crisis, short-selling looked really good.
Tsekova: You know, you can imagine after 2008, this was a very glamorous industry that was doing very well. They predicted so many things they were getting big gains. They were getting a lot of inflows.
Gura: People wanted to invest with short sellers. Denitsa says the amount of money going into short-selling tripled after 2008, reaching a peak of nearly $8 billion. But since then, there’s been a complete reversal. Investments in short-selling have basically fallen by half.
Tsekova: That industry has shrunk so much. And this is happening as the broader hedge fund industry is growing at a crazy pace. It's tripled in the last 10 years or so.
Gura: Denitsa spoke to Jim Chanos, one of the most legendary short-sellers on Wall Street, who recently closed his hedge fund because of how tough it’s become to be a short-seller.
Tsekova: He told us you cannot raise capital for short selling. You just cannot do it now. So you can imagine if Jim Chanos himself cannot raise capital, who can raise capital for those strategies?
Gura: After the break: what's driving this downturn in short-selling — and what the return of meme stocks means for their demise?
Gura: Over the last five months, Bloomberg’s Denitsa Tsekova has spoken to some of Wall Street's best-known short-sellers, about what's led to a dramatic downturn in this kind of investing.
Gura: What did they tell you about why this is happening— why we're seeing this decline in short selling? What's their read on what's going on in the marketplace?
Tsekova: There are so many forces that are threatening short selling, like the most basic one is just like we've been in a relentless bull market. Like, just imagine holding any type of short bet when markets go up all the time. It's just like the basic just doesn't work along with that relentless rally. How do you explain to investors that it's worth going into short selling when you can buy Nvidia, when you can buy tech stocks and have insane gains? Why would you go into this super sophisticated, complex, risky approach that also has unlimited losses potentially. So it's hard to sell. It's a tough pitch.
Gura: As we’ve mentioned, short sellers make money when markets go down, stocks tumble or companies tank. And for the most part… over the last decade… everything, everywhere has been going up. Well, all that good news … has been devastating to short-sellers.
Tsekova: People have been predicting a very hard recession. People have been predicting a big spike in bankruptcies, and we really haven't seen that much of a severe or any big impact on the economy. So that's part of the problem: that after years of big growth, stocks are still doing well, the economy is doing well, so there hasn't been any big event that short sellers could potentially predict.
Gura: And Denitsa says it’s not … the only force working against them..
Tsekova And of course, retail traders. This is a fresh new trauma for short sellers. And it's a big one.
Gura: Retail traders, also known as “dumb money,” also known as “meme stocks.” This was the whole social movement — the cultural phenomenon — that really took off in 2021, when an online army of Redditors and small-time investors … started snapping up millions of shares in companies like GameStop and AMC… in a direct attack on the hedge funds that had been shorting those stocks. Investors like Keith Gill, also known as Roaring Kitty, wanted to drive the share prices of those companies sky high, making themselves rich... and forcing those short-sellers to eat huge losses.
Keith Gill: GameStop is one of the most compelling asymmetric opportunities in the market today. But based on prevailing sentiment, the market, and popular culture, many think it's a foolish investment. But everyone's wrong. It's like the Big Short again. Or more like the Big Short Squeeze this time, right?
Gura: These investors drove the share price of Game Stop up more than 1000% at one point, causing catastrophic losses for the companies that had shorted the stock. And even though Gamestop's share price eventually fell, Denitsa says… the meme stock movement … exposed a vulnerability of short-selling.
Tsekova: I think that was one of the biggest milestone moments for short sellers. This is when we started seeing all those closures and the names that are left now, we have really seen them changing their strategies. Some of them have gone long-only. Some of them have a lot more long exposure now to mitigate those losses. There is even the person— like the people element of this, of just like the public scrutiny, has been back at full force. There have been movies, social media— those people are the enemy of the people. So definitely, it's been a game changer.
Gura: Since 2021, Denitsa says most short-sellers have changed their strategy and now … tend to avoid well-known companies that online meme stock investors might rally behind. So even though Keith Gill, better known as Roaring Kitty, is back in the news this week, having posted a screenshot of his supposed hundred-million stake in GameStop, there are now fewer people betting that the stock will fall. But one big consequence of the 2021 frenzy was a flurry of increased scrutiny from regulators.
Tsekova: After 2021, there was a big campaign. It emerged that many activist short sellers were under investigation by the Justice Department, by the Securities and Exchange Commission for market manipulation. So a lot of those short sellers live in fear— in fear that they may be investigated. On top of all those agencies chasing short sellers, there are governments around the world who are notoriously not happy about short sellers and are introducing bans or short term regulation. We have seen that in China. We have seen that in South Korea. So there is just too much going on.
Gura: Runaway markets. Meme stock movements. More scrutiny from regulators. It is not easy being a short seller these days.
Tsekova: If you ask most of the short sellers, this is probably the worst and most difficult year they've had in quite some time. Can they recover from this? Potentially. They are adjusting. They're thinking about retail traders being active. And generally in investing after a strategy has been shrinking and has had a really bad time, we have often seen a little bit of revival. We're seeing a lot of younger new entrants in the field who maybe are not making as much money and like raising big capital and going to pension funds but are releasing those reports and are very passionate about the industry. So it continues to be a thing. So maybe that big drop, that big demise we have seen in the last few years, maybe at some point there is some kind of renaissance.
Gura: A renaissance… so it might be a little early to send short selling to a retirement community in South Florida. After all, it was a moment just like this, back in 2008, when markets were on a tear and nobody could imagine betting against them… that the few who did made their fortunes. And even those who say they’re sitting this one out are rethinking their plans. On Monday, short seller Andrew Left, the one who told Denitsa that they’re a “dying breed,” phoned her up and told her he had taken a small short position on Game Stop because it’s “fun” to trade.
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