Despite Strong Bull Market, Many Activist Short Sellers Deliver Big ReturnsMark W. Gaffney
Why would anyone want to be profiled among activist short-sellers?
“You have no friends; you have no natural helpers; everyone is rooting against you; the market’s upward bias is against you; management hates you; you get sued; you get death threats and you’re happy when everyone’s sad.”
This is how Marc Cohodes, former head of a billion dollar short selling hedge fund describes his profession in an interview with ValueWalk. Cohodes is now in semi-retirement, splitting time between running a chicken farm and placing high-profile short bets with his personal money. Both enterprises are reportedly doing very well.
Activist short sellers seek to unearth fraud, promotion schemes and other management deception at publicly traded companies. Once corrupt and overvalued companies are identified, the activist sells short the target company’s shares, betting prices will fall. The activist then goes public with allegations of impropriety via a scathingly accusatory research report. The shorted shares are hopefully bought back at a profit when and if the stock price collapses.
But Wall Street and main street has long viewed short-sellers as the stock market’s version of ambulance-chasing lawyers -- people who make a career profiting from others misfortune. The public perception is that when shorts are successful, people lose their jobs and investors lose their retirement savings; meanwhile the short-seller who profited from the stock's decline is seen as laughing all the way to the bank.
Never mind that many studies have concluded that short-selling is not a detriment to freely traded stock markets, and actually provides benefits by targeting overvalued companies. Still, if you want to be popular, activist short selling is not the way to do it. As Cohodes puts it: “I think people who are really into the short-selling thing -- and there are very few and even fewer who are really good at it -- have to be deranged in the head. I mean there’s something clearly wrong with you to do this.”
Activist short-sellers however see themselves as the good guys. Like investigative reporters and corporate whistleblowers, activist short-sellers believe they benefit society by doing the work that regulators are often unable or unwilling to do -- protecting the innocent shareholder by uncovering fraud and deception, and holding crooks feet to the fire.
But altruism aside, there is another reason to be an activist short-seller: You can make a lot of money. And investors who copy activists short selling moves can also reap big profits.