The Dark Money Funding the Rise of Activist Short Sellers

Monday 18 January 2021

Activist short sellers are on the rise. The practice of identifying a fraudulent or overvalued company, taking a short position, and then writing a scathing research report and releasing it to the public has become big business. Australian alternative asset manager Blue Sky Alternative Investments saw the effect as an activist short seller report spooked the market and sent their business into receivership. One notable short selling name is US-based Muddy Waters Research that have identified a string of fraudulent Chinese companies.

This article from Institutional Investor has taken a look at the practice of activist short selling and raised questions about the money behind it. It labels firms like Muddy Waters ‘balance sheet’ short sellers, that often financially support smaller short sellers to publish their research.

While this article looks to raise controversy, we can’t see it. Short sellers are the most hated pocket of the market, investors and company executives alike don’t like short sellers criticising stocks they hold or companies they work for. Yet, the long list of companies that short sellers have exposed where market regulators have failed is justification enough for these short sellers to exist.

Sure, there are some short sellers that try and made a quick buck by closing out their short immediately after a short seller report is released. Yet, over the long term, if these short sellers are wrong these companies will recover. If they are right, they are serving an important role in the information discovery process of public markets. It is just a reminder of Benjamin Graham’s quote, “in the short run, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company.

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