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People go to Miami for a lot of reasons, winter Sun, the Cuban food retirement. But bloombergs Denis at Tekova recently traveled to South Florida for something a little bit different.
So I went to a conference in Miami, which is one of the biggest hedge fund conferences is Hedge Fund Week.
Hedge Fund Week is a can't miss event for a select group of investors who manage billions of dollars. Looking at the agenda, there is a lot of what you might expect at a gathering of hedge fund managers on Biscayne Bay, a yacht brunch followed by a yacht lunch and then you guessed it, a yacht cocktail hour.
And there were many panos with many big names, and one of the most exciting panos was getting together a lot of the investors who were featured in The Big Shirts. Obviously, probably the most emblematic movie for shorts hours.
The Big Short. That's the film the director Adam McKay made based on the Michael Lewis book of the same name. It's about a group of investors, including Steve Eisman. They bet against the early two thousands housing bubble and made a killing as the rest of the world was plunged into the Great Recession.
The expectation of the panel was the next big short. It was just like, what have you been doing? What are you looking at? What is the next big thing that is going to break? And I also came into that panel with the expectation of, Wow, I'm gonna like, I'm gonna break news about Steve Eisman's announcing a short.
They need to settled in. Sadly, it was not a yacht panel. It was just in a cramped room with beije wallpaper and slat blinds, in other words, the perfect place to break some news.
And then we went in into the panel and a lot of them were like, well, we're not really shorting many things, like Steve Eisman said, I'm actually more of a long oriented investor now and I'm happier, I'm blissful, I have more time with my.
Family, spending time with his family, bliss going long. This was not what she expected Steve Eisman to say. He made his name as a short investor, and the surprises kept coming. As Denitza started talking to some of Eisman's rivals to other short sellers. She called up Andrew Left, one of the world's best known short sellers, and he told her short sellers like him are a dying breed. Now, short sellers have never been beloved on Wall Street.
We had the former New York Stock Exchange head describing them as Unamerican and ekey.
But don't go cheering their demise just yet. Today on the show, is this the end of the line for short sellers? I'm David Gerra, and this is the big take from Bloomberg News. Before we jump in, let's start with the basics with what short selling is.
Yeah, in simple terms, shorts would be the opposite of going.
Along, all right, let me tease that out just a little bit more. When an investor goes long, it's because he has reason to believe the price of a security, whether it's a stock, a bond, or some other asset, is likely to go up. He's betting on that. When an investor goes short, he's betting that a business or an asset is overvalued and its price is going to go down. And Bloomberg's de needs at Tekova says this has been going on for hundreds of years.
It's actually a practice that nothing new. Has been around for a very long time, and it's something that's always been heavily scrutinized. The way it has played out is eventually there is a market crush, and the easy people to blame have been short servers. Even Napoleon himself has famously said that they're an enemy of the state as they add more volatility and then it's harder for him to finance his wors. So this has been a theme for hundreds of years.
So they don't generally have a great reputation.
They don't have a good reputation yet.
To be a short seller means you're essentially betting on the price of an asset falling or going down. There are a lot of ways you can do this, but the main way big investors do it is by borrowing shares in a company, selling them at a high price, then hopefully buying them back at a lower price before returning them. But there's a key difference between going long and going short.
The big difference with long is if you buy something long, obviously your losses are capped.
You can bet that a company's share price will rise, but if you're wrong, well, there's a limit on how much money you'd lose if it were to fall. Stock prices can't go below zero. But if you bet the company's stock will fall and it goes up instead.
The downside is unlimited. So obviously a really tough place to be in.
So there's a lot of risk, but the upside can be big. If a company's stock goes down, lose its value, goes bankrupt when nobody else thought it would, you can make a lot of money. But and there is a butt here, the situation that made you a lot of money is likely to be very bad for the business you've bet against and for anyone who's invested in it.
If you think about investing in general, the majority of population hope that stocks will go up. So we all invest our pensions, our brokerage accounts, and you know, we hope the SNP reaches a new highs. And then there is a group of people who comes out and releases a report and says, well, we actually hope this drops, and like it drops one hundred percent and the company
crumbles and you know, it goes into bankruptcy. So it's just like a very contrarian point to be in the first place, and it's it's hard to be to be going against the masses. It is hard to be going against people who have put their pension is an s and P. Five hundred. It's hard to tell them that, you know, I've released the short report, so I hope this company goes into bankruptcy.
Betting on bankruptcy can be a bit unsavory, but Denitza says short sellers have played an essential role.
If we go back to academic literature, they're actually proven to be healthy for markets. There are numerous papers showing that short selling activity has been shown to be an a break on bad corporate behavior. It has shown that it keeps the prices of companies with questionable finances in check. Then, in theory, short sellers could come in and say, hey, this company finances are really bad. It doesn't make sense for it to go up two hundred percent, so let's short it.
This is exactly what happened in the two thousand and eight housing crisis. Banks and mortgage lenders were selling bad loans, everyone was buying. The markets were flying high, but a small number of investors thought this was too good to be true and decided to bet against them. Against everybody really and when the housing market collapsed, it made those short sellers seem like oracles in a market steeped in deception.
They were brave enough to see things clearly and they won big And in the wake of the housing crisis, short selling looked really good.
You know, you can imagine after two thousand and eight, this was a very glamorous industry that was doing very well. They predicted so many things, they were getting big gains, they were getting a lot of inflows.
People wanted to invest with short sellers. Dditza says the amount of money going into short selling tripled after two thousand and eight, reaching a peak of nearly eight billion dollars. But since then there's been a complete reversal. Investments in short selling have basically fallen by half.
That industry has shrunk so much, and this is happening as the broader hedge from the industry is growing out a crazy pace. It's treat both in the last ten years or so.
Deniza spoke to Jim Chenos, one of the most legendary short sellers on Wall Street, who recently closed his hedge fund because of how tough it's become to be a short seller.
He told us, you cannot raise capito for short selling. You just cannot do it now. So you can imagine if Jim Channas himself cannot raise capito, who can raise capital for those strategies.
After the break? What's driving this downturn in short selling and what the return of memestocks means for their demise Over the last five months, Bloomberg's denitze at Tekova has spoken to some of Wall Street's best known short sellers about what's led to a dramatic downturn in this kind of investing. What if they tell you about why this is happening, why we're seeing this decline in short selling, what's their read on what's going on in the marketplace.
There are so many forces that are threatening short selling, Like the most basic one, it's just like we've been in a relentless boom market. Like just imagine holding any type of short bed when markets go up all the time. It's just like the basic just doesn't work along with
that relentless rally. How do you explain to investors that it's worth going into short selling when you can buy in video, when you can buy tech stocks have in saying games, Why would you go into this super sophisticated, complex risky approach that also has unlimited losses potentially, So it's hard to sell. It's a tough pitch.
As we've mentioned, short sellers make money when markets go down, stocks tumble, or company's tank, and for the most part, over the last decade, everything everywhere has been going up. Well, all that good news has been devastating to short sellers.
People have been predicting a very hard recession. People have been predicting a big spike in bankruptcies, and we really haven't seen that much of a severe or any big impact on the economy. So that's part of the problem that after years of big growth, stocks are still doing well, the economy is doing well, So there hasn't been any big event that short sellers could potentially predict.
And Denitza says it's not the only force working against them, and.
Of course retail traders. This is fresh new trauma for short sellers and it's a big one.
Retail traders aka dumb money aka meme stocks. This was the whole social movement, the cultural phenomenon that really took off in twenty twenty one, when an online army of redditors and small time investors started snapping up millions of shares in companies like game Stop and AMC in a direct attack on the hedge funds that have been shorting
those stocks. Investors like Keith Gill, also known as Roaring Kitty I, wanted to drive the share prices of those companies sky high, making themselves rich and forcing those short sellers to eat huge losses.
GameStop is one of the most compelling asymmetric opportunities in the market today, well based on prevailing sentiment the market in popular culture. Many think it's a foolish investment, but everyone's wrong. It's take the big short again, more like the big short squeeze this time right.
These investors drove the share price of game Stop up more than one thousand percent at one point, causing catastrophic losses for the companies that had shorted the stop. And even though game stops share price eventually fell, Denitza says the meme stock movement exposed a vulnerability of short selling.
I think that was one of the biggest milestone moments for short sailers. This is when we started seeing all those closures and the names that are left Now we have really seen them changing their strategies. Some of them have gone along only some of them that have a lot more long exposure now to mitigate those losses. There is even the person, the people element of this of just like the public scrutiny has been back at full force. There have been movies, social media. Those people are the
enemy of the people. So definitely it's been a game changer.
Since twenty twenty one, Denitza says most short sellers have changed their strategy and now tend to avoid well known companies that online memestock investors might rally behind. Even though Keith Gill, better known as Roaring Kitty, is back in the news this week having posted a screenshot of his supposed one hundred million dollars stake in game Stop, there were now fewer people betting that the stock will fall.
But one big consequence of the twenty twenty one frenzy was a flurry of increased scrutiny from regulators.
After twenty twenty one, there was a big campaign. It emerged that many activists, shortsaillers were under investigation by the Justice Department by the Securities and Exchange Commission for Market manipulation so a lot of those short sellers live in fear, in fear that they may be investigated. On top of all those agencies chasing short sellers, there are governments around the world who are notoriously not happy about short sellers
and are introducing bands or short term regulation. We have seen that in China, we have seen that in South Korea. So there is just too much going.
On, runaway markets, meme stock movements, more scrutiny from regulators. It is not easy being a short seller these days.
If you ask most of the short sellers, this is probably the worst and most difficult here they've had in quite some time. Can they recover from this? Potentially they are adjusting their thinking about tweetail traders, being active and generally in investing. After a strategy has been shrinking and has had a really bad time, we have often seen
a little bit of revival. We're seeing a lot of younger new entrance in the field who maybe are not making as much money and like raising big capital and going to pension funds, but are releasing those reports and are very passionate about the industry. So it continues to be a thing. So maybe that big drop, that big demise we have seen in the last few years. Maybe at some point there is some kind of renaissance.
A renaissance, So it might be a little early to send short selling to a retirement community in South Florida. After all, it was a moment just like this back in two thousand and eight when markets were on a tear and nobody could imagine betting against them. That the few who did made their fortunes, and even those who say they're sitting this one out are rethinking their plan.
On Monday, short seller Andrew Left, the one who told Dnizza that they're a dying breed, phoned her up and told her he had taken a small short position on GameStop because it's fun to trade. This is the big take from Bloomberg News. I'm David Gura. This episode was produced by David Fox. It was edited by Stacy Vanick Smith, Sam Potter, and Sid Verma. It was mixed by Alex Segura. It was fact checked by Thomas lou Naomi Shaven and Kim Gittleson are our senior producers. Our senior editor is
Elizabeth Ponso. Nicole Beamster Bor is our executive producer. Sage Bauman is Bloomberg's head of podcasts. If you liked this episode, make sure you subscribe and review The Big Take wherever you get your podcasts. It helps people find the show. Thanks so much for listening. We'll be back tomorrow