Hindenburg Research was widely recognized as a top performer in the world of activist short selling.
That’s why its abrupt shutdown last week sent waves across an industry in which pointing out company fraud and misconduct has become one of the riskiest, burdensome, and loathed corners of Wall Street.
Founder Nate Anderson gave no specific reason when he announced the closure of his firm, which rose to fame in 2020 with the short call of electric vehicle startup Nikola (NKLA). Since then, his targets have included Indian conglomerate Adani, holding conglomerate Icahn Enterprises (IEP), and most recently, server maker Super Micro Computer (SMCI).
“So why disband now? There is not one specific thing — no particular threat, no health issue, and no big personal issue,” wrote Anderson on his firm’s site. He credited Hindenburg’s work for playing a role in nearly 100 individuals charged civilly or criminally, “including billionaires and oligarchs.”
But some industry watchers aren’t totally surprised to see the iconic short seller close shop a little more than a year after Jim Chanos, famous for wagering against Enron in 2001 also threw in the towel.
“It’s a very tough business not just because markets rip and are built to go up, but it puts a lot of wear and tear on you,” Carson Block, founder and chief investment officer of Muddy Waters Capital told Yahoo Finance.
Simply put, the business of short selling in public has become increasingly scrutinized, litigious, and costly.
“Every year the bar to find ‘stories,’ for lack of a better word, that investors would care about gets higher,” Block explained. “There’s just more complacency built in because basically all this easy money was anesthetizing investors to risk.”
Short sellers borrow shares of a company they believe will go down in value and sell them. Once the stock price drops, they buy the shares back and return them to the lender, making a profit on the downside. Activist short sellers go further: They make a living by publishing reports claiming fraud or other misconduct at a company — and gain when its stock falls. Industry insiders say their research may include information from hedge funds looking to avoid recognition.
Depending on the structure of a deal, the research may be shared for free with the short-selling firm. Agreements can include shared profits or payment for legal fees in case the target company sues.
Though hedge funds tend to use short selling as an “insurance” to reduce exposure against a market drawdown or correction, the practice of exposing overvaluation or fraud hasn’t been widely appreciated by most investors in a bull market, said Drayton D’Silva, CEO and chief investment officer at Tower Hills Capital.
“There’s this —essentially animosity and resentment towards short sellers because typically the average person is always going long,” D’Silva said.
“Yes [short selling] it does destroy value, but that value was always fake,” he added.
Moving on: Nate Anderson of Hindenburg Research in New York, New York. (Bonnie Jo Mount/The Washington Post via Getty Images) ·The Washington Post via Getty Images
The epic retail investor-led short squeeze of video game retailer GameStop (GME) in 2021 that resulted in billions of dollars in losses of former hedge fund Melvin Capital put the focus, at least in recent years, on the practice of short selling. The meme frenzy that ensued prompted greater scrutiny of the business of targeting overvalued stocks.
“There was greater attention by the public to short selling. And because there was greater attention by the public to short selling, I think that drove politician and regulatory interest,” said Dan Taylor, a professor at the University of Pennsylvania Wharton School.
Enter the Securities and Exchange Commission.
Last year, the SEC announced charges against activist short seller Andrew Left and Citron Capital, in what regulators described “as a $20 million multi-year scheme to defraud followers by publishing false and misleading statements related to stock trading recommendations.”
In an interview with CNBC earlier this month, Left said, “I’ve never been accused by the SEC or the DOJ of ever lying about a company. That’s the key thing. I speak the truth about companies.”
Also, in early January the Securities and Exchange Commission implemented new disclosure requirements intended to bring more transparency about funds’ short-selling practices. The rules require reporting to the SEC daily short positions of at least $10 million. The agency will publish the aggregate of daily activity within about 30 days after the end of each calendar month.
Taylor believes such rules are “too tough.”
“Why are we focusing here on disclosing short positions at the daily level, as opposed to both short and long positions at the daily level,” Taylor said. “It’s not that one type of position is necessarily more manipulative or more suspicious.”
Exposing Enron: Jim Chanos, Founder and Managing Partner of Kynikos Associates in 2013. (REUTERS/Mike Segar) ·REUTERS / Reuters
Tough rules aside, activists may be in the midst of a self-imposed pause.
“I think there’s a cyclical component here, and we’re coming out of a period that has been really tough for activist short sellers,” said Block of Muddy Waters Capital, though he pointed out 2021 turned out to be a good year for short selling.
Hindenburg’s closure comes as the number of prominent players has declined in recent years. Breakout Point, a data analysis tracking site listed 42 active short seller firms last year, down from 62 in 2020.
Even so, the timing of Hindenburg’s disbanding remains an enigma.
Among the top activists, Hindenburg has consistently ranked as a high performer, holding the No. 1 slot in 2024 based on the number of published reports, according to Breakout Point data.
“He’s basically going out on top,” Block said. “Most people when they leave short selling, it’s after they’ve experienced a reversal of fortune. So Nate’s ahead of the curve on that one.”
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
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Heather Ochoa is a news writer at the Failsafe Podcast. She has been writing about politics, health, business, parenting and finance for over a decade. She also loves to go hiking in her free time.
