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TheLonelinessoftheShortSeller
ByALEXANDRASTEVENSON

JUNE22,2015

Forsome,theyarethescourgeofWallStreet.Yetshortsellersinvestors
whostakebetsagainststocksareoftenthefirsttosoundthealarmona
marketsfrothoracompanysfraud.
Now,sixyearsintoabullmarketrun,withstocksintheUnitedStates
smashingonerecordafteranother,thesenaysayershaveallbutlosttheir
voice.
WilliamA.Ackman,whohasyettoprevailinabilliondollarbetagainst
Herbalife,saidhewouldthinkveryhardbeforemakinganothershortbet.
JamesS.Chanos,theshortsellerwhohelpedexposeEnron,andwhohaslong
beenseenasthefiercestoftheshortsellingbears,isnowaddingafundthat
willinsteadfocusonbuyingstocks.
Shortsellingisanincrediblylonelyproposition,Mr.Ackmansaidinan
interview.
Criticsaccuseshortsellersofbeingunpatrioticandsaytheirstrategyof
takingpublicaimatcertaincompaniesandthenprofitingfromthefallout
isakintomarketmanipulation.Butproponentsarguethattheyplayacritical
roleintemperingmarketexuberance.
Peopleoftendontrecognizetheimportanceofshortsellingin
identifyingfraud,deflatingbubblesandbeingthebuyersoflastresortwhen
stocksfall,saidMr.Ackman,whoformorethantwoyearshaspublicly

arguedthatthevitaminsupplementscompanyHerbalifeisapyramidscheme.
(Herbaliferejectsthatcharacterization.)
Asstockscontinuetoclimbhigher,someworrythatabsentahealthydose
ofskepticisminthemarket,investorsrushingtoparticipateintherallyare
layingthefoundationforthenextcrisis.
Beingashortsellerisnolongerworththetroubleformanyhedgefund
managers.InvestorsdontwanttomissoutonarallythatliftedtheStandard
&Poors500stockindextoarecordhighinMay.Cateringtothatdemand,
hedgefundshaveabandoned,orparedback,theirshortpositions.Overall
exposuretolongpositionsbyhedgefundshasreachedahighnotseensince
2007,ayearbeforethefinancialcrisis.Shortpositions,meanwhile,aremuch
lowerthantheywereatthattime,accordingtoresearchbyBankofAmerica
MerrillLynch.
Bettingagainstthemarketisnotworththeexpense,either.Totakea
shortposition,traderssellborrowedstockinacompanytheythinkis
overvaluedwiththehopeofbuyingitbackatalowerprice.Ifthestockprice
goesupinstead,shortsellershavetobuymorestockinordertocoverthe
position,whichinturnpushespriceshigher.Overthelastseveralyears,
tradershavehemorrhagedmoneyonsuchbets,reportingpercentagelosses
thataresometimesinthedoubledigits,accordingtodatacompiledbyHFR,a
researchfirm.
In2014,morethan$1.3billionflowedoutofshortbiasedfunds,aresult
oflossesandinvestorswithdrawingtheirmoney,accordingtoHFRestimates.
Withintheuniverseof8,431hedgefunds,thereareonly17thatareshort
biased,accordingtoHFRdata.(TheFinancialTimesearlierreportedonthe
HFRdata.)
Hedgefundsthatshortedcertainhighflyingstockshavebeenpulverized.
TakeTesla,themakerofluxuryelectriccars.Foryears,itwasafavoriteamong
shortsellers,whoquestionedeverythingfromitsbusinessmodeltoits
forecastsforrevenues.Despitethepessimism,thestocksuddenlygainedmore
than600percentfromearly2013untilSeptemberoflastyear.Theshareprice
hassincecomedownslightly,butataround$260ashareitisstillmuch

higherthantheroughly$30ashareittradedbeforetherunup.
Itsbeenanextremelydifficultperiodformanyshortbiasedmanagers,
asnegativeperformanceduringthisprolongedbullmarkethasledtocapital
outflows,forcingsometothrowinthetowelasothersstruggletokeepthe
lightson,saidJosephLarucci,acofounderofthehedgefundadvisoryfirm
Aksia.
Itwasntalwaysthisway.Intheturmoilofthefinancialcrisis,short
sellerswereking.ThosewhobetonthecollapseofLehmanBrothersandBear
Stearnsmadeamint.Asthemarketspiraledviolentlydownwardin2008,the
WallStreetbanksthatwerestillstandingpointedtheblameatshortsellers.In
Septemberofthatyear,theSecuritiesandExchangeCommissionissueda
temporarybanonshortsellers.
Nevertheless,bytheendof2008,shortbiasedhedgefundshadmadean
averagereturnof28percent,comparedwithadeclineof38percentacrossthe
S.&P.500,accordingtoHFR.
Steppingintopickupthepiecesintheaftermathofthecrisis,theUnited
StatesFederalReservepumpedtrillionsofdollarsintothefinancialsystem,
pushingupthepriceofassets.Thegovernmentalsotampeddowninterest
ratestoalltimelows,promptingindividualinvestorswithretirementand
pensionfundstolookforinvestmentsthatwouldyieldbiggerreturnsthan
Treasurysecurities.
Everymarkethasitsowncharacteristics,theyallhaveastoryand
narrative,andthisonereallyisallaboutthecentralbank,saidMr.Chanos,
founderofthehedgefundKynikosAssociates.Thenarrative,headded,isthat
thecentralbankhasyourbackandthatsembeddedineverybodyspsyche
andportfolio.
Thisconfidence,inturn,fueledaboominmergersandacquisitionsand
spurredcompaniestobuybackrecordnumbersofsharesfromshareholders
twooftheworstnightmaresforanyshortseller.Tomitigatetherisk,many
movedtodiversifythenumberofcompaniestheywereshorting.
Investors,fortheirpart,havesoughttoplacetheirmoneywithhedge
fundsthatofferlongonlyfunds,accordingtoaDeutscheBanksurveyof435

globalhedgefundinvestorsholdinghalftheindustrys$3trillioninassets
undermanagement.Nearlyhalfofthosesurveyedwerealreadyallocatedto
longonlyhedgefunds,while38percentsaidthattheyplannedtoincrease
theirallocationtosuchfunds.
Withthistidalshiftindemand,shortsellershavelookedtoraisemoney
byadjustingtheirpitchtoinvestors.Mr.ChanossKynikosAssociates,for
example,ispitchinganewfundtoinvestorsthatwilltakeaportfoliooflong
positionsandoverlaythefirmstraditionalshortportfolio,accordingto
marketingdocumentsreviewedbyTheNewYorkTimes.Theamountof
moneythatKynikosmanageshasmorethanhalvedinthelastfiveyears,to
$2.5billiontodayfrom$6billion,accordingtoregulatoryfilings.
Evenasinvestorsembracethemarketrally,therearesignsthatnot
everyonebelievesitissustainable.
Idothinkitisanincrediblyunlovedbullmarket,saidEricPetersof
PetersCapitalGroup.ItiscertainlyunlikeanymajorbullmarketthatIhave
seeninthatnewhighshaveoccurredintheabsenceofeuphoria.
Pointingtooptionstrading,Mr.Peterssaidthecostforinvestorstoinsure
againsta10percentdeclineintheS.&P.500relativetothecostofinsuring
againsta10percentrallyintheS.&P.500isthreetimeshigherthanits
historicalaverage.
Itstellingyouthatpeoplearewillingtopayalotmoreforprotectionon
thedownsideinareallybigway,hesaid.
Andsomeinvestorsarestartingtolookaroundforshortsellerstohelp
themfindtheexits.JimCarruthers,aformermanageratDanielS.Loebs
ThirdPoint,raisedmorethan$200millionfrominvestorsincludingYales
endowmentfundlastyeartostartashortbiasedfund.
Theothershortsellerswhoremain,meanwhile,havealsobeenproved
rightonoccasion.WhitneyTilsonreapedawindfallthisyearwhenLumber
Liquidators,aflooringcompanyheattackedformorethanayear,accusingit
ofsellinganunsafeproduct,cameunderpressureafterareportby60
MinutesinMarch.SharesofLumberLiquidatorstumbled25percenttheday
afterthebroadcast,whichaccuseditofsellingatypeofChineselaminate

flooringthatcontaineddangerouslevelsofformaldehyde.
Othershortsellersarewaitingpatientlyinthewings,amongthemBill
Fleckenstein.Heplannedtostartashortfundlastyear,butlaterdecidedit
wasnotpossibletodosuccessfullywhilethecentralbankcontinuedtopump
moneyintothefinancialsystem.
Youcankeepthepartygoing,butthereisgoingtobeahangover,Mr.
Fleckensteinsaid.
Mr.Chanosusedasimilaranalogytodescribethemarkettoday.
Asonefamousbankeroncesaid,Mr.Chanosrecalled,referringtoanow
famous2007commentfromCharlesO.Prince,thentheexecutiveof
Citigroup,itshardtostopdancingwhilethemusicisplaying.
AversionofthisarticleappearsinprintonJune23,2015,onpageB1oftheNewYorkeditionwith
theheadline:TheLonelinessoftheShortSeller.

2015TheNewYorkTimesCompany