To be sure, many of the short positions that were flushed out recently would’ve been considered highly risky — even before the pyrotechnicians of today’s commission-free trading world began squirting gasoline on them. GameStop, for example, traded with short interest much higher than 100% of its free float due to bearish traders who borrowed and sold shares that had already been borrowed and sold.
‘Run Over’
“Why people are trying to short a company with 141% short interest, I don’t know,” said Perring. “We avoid them because we’re just going to get drowned out by this. The people have worked out that, on high short-interest stocks, if you get a couple of thousand people buying a few thousand worth of calls and a bit of equity, they can run you over.”
Of course, when a short seller does get run over, there is often little sympathy except among fellow travelers of this investing road less taken.
Specializing in shorting equities as a hedge-fund strategy has always required fighting off or withstanding personal vilification by the executives and shareholders of the companies targeted. One fund manager’s “exhaustive, critical research” is another C-suite executive’s slings and arrows of outrageous fortune. As a result, even an impressive history of returns in a bull market may not guarantee a commensurate reward of cash from clients.
That means the current chat-room campaigns could pose an existential crisis for some activist shorts. Investors with deep pockets and an abundance of patience to ride out bad shorts, like Bill Ackman’s famously futile five-year campaign against Herbalife, are few and far between.
“It’s about who can stay solvent the longest,” said Perring of Viceroy. “And we know that’s not the shorts.”
Still, for every crisis there is opportunity, and shorts probably know this better than anyone. While hordes of newly minted day traders may be destroying bearish positions, the message-board culture of 2021 has also created excessive bullishness in some stocks that could prove to be fertile ground for future bears, according to Sahm Adrangi, founder and chief investment officer of Kerrisdale Capital Management, a hedge fund with $700 million in assets that focuses on activist short-selling.
‘Trolled’
Adrangi is not convinced that the strategy of publicizing critical research will end up a casualty of this year’s speculative frenzy, even after his firm became a target of message-board traders.
“I don’t think we’ve ever been trolled or targeted as much as now, but it’s part of what we do,” he said.
Some of his firm’s recent targets — Plug Power Inc., FuboTV Inc. and Tattooed Chef Inc. — plunged as much as 9% to 17% during the session after the research was released. Each stock recovered some off its low of the day, but still ended down at least 6%.
“It’s great for us if you get a ton of investors that crowd into a name on the long side and they don’t know what they own,” he said. “When we share our research, they’re going to pay attention and there will be a ton of volume. There’s going to be a real debate and it won’t be a bunch of sleepy mutual funds. We don’t have a problem with it.”
—With assistance from Vildana Hajric and Erik Schatzker.
This article was provided by Bloomberg News.