Short sellers represent the end of an era when Rookies rule Wall Street

Photographer: Spencer Platt / Getty Images

The latest attack on Wall Street short sellers has a long tradition, going back to, well, at least Napoleon. “Treacherous,” he called them for betting against government paper.

They survived that and countless other attacks over the centuries that followed. But the GameStop uprising could end an era for the public short-circuit – the long-maligned people who try to eradicate corporate abuses, take positions betting that a stock will fall, and then run public campaigns.

The biggest victim came on Friday, when Andrew Left’s Citron Research said it will stop offering short selling analytics after 20 years. Others already apply less aggressive tactics or evolve into completely different shapes and guises. Melvin Capital was forced to pull out by ditching his short position on GameStop, Carson Block, and others cut bets, and some of the most powerful hedge funds take care of it double digit losses and exploring their next steps.

Few on main Street or in corporate America, who see short sellers as detestable vultures with dubious practices, who of course shed many tears. But some investors, who say shorts are for monitoring the markets, may be. Time and again, short sellers, who practice the risky art of selling borrowed stock to buy them back at lower prices, are seen as a crucial antidote to detecting fraudulent companies, companies with questionable accounting and business plans, or simply to keep valuations under control. Enron is the most striking example.

“I’m still doing business, so now I think that’s good enough,” said Fahmi Quadir, a short seller best known for her successful bet against Valeant Pharmaceuticals and founder of New York hedge fund Safkhet Capital. The more fundamental problem, she said, is that fewer and fewer companies are spending substantial money on research companies or, in her case, “identifying companies that are predatory or fraudulent.”

Even before the onslaught of Reddit’s wallstreetbets forum, where a 6 million strong crowd teamed up to light stocks most hated by hedge fund elites, short selling was hard enough. The vast majority of shorts were already irrelevant, thanks to the popularity of index funds and the longest-running bull market in history.

Their numbers have been declining for some time. Of the thousands of $ 3.6 trillion hedge funds in the industry, only about 120 specialize in primarily betting against stocks. And according to data from Eurekahedge, its combined assets have decreased by more than half in the past two years to just $ 9.6 billion.

“It’s like watching the police do a bank robbery,” said Crispin Odey, one of the world’s most bearish hedge fund managers, of the trend. “There were fewer short positions in the market before the Reddit crowd launched their onslaught than we’ve seen in 15 years.”

A struggling art

Short sellers are under pressure in rising markets

Source: Eurekahedge

Some of the most feared short sellers are taking cover. Block, whose forensic investigation notes have led to steep declines at a number of companies, has done just that “Massively” short bets have been shortened. A $ 1.5 billion London-based hedge fund with one of the best short selling records was not even mentioned in this story for fear of being hunted by private investors. Another has hired an executive to scour the wallstreet bets page for signs of breaking uprisings as it reassesses its bets.

Read more: Reddit Crowd Bludgeons Melvin Capital in Warning to Industry

Short-seller Gabriel Grego, founder of Quintessential Capital Management, said he is discontinuing bearish betting in the US. Thinking short selling is alive and well, he said it is time for caution. The GameStop uprising shows that retail investors are now aware of their power and that it will not disappear, he added.

Hated but necessary

Shorts have faced such sieges time and again in their more than four centuries of existence. The first such trade is said to have taken place in 1609, when the Flemish merchant Isaac Le Maire tried to short the shares of the Dutch East India Company. A year later, the company convinced the Dutch government to ban short-selling, saying people like Le Maire were doing harm to innocent shareholders, including “widows and orphans.”

Napoleon banned the practice 200 years later, and during the 1929 Wall Street crash, short-seller Ben Smith hired bodyguards due to threats from angry investors. As the financial crisis intensified in 2008, US regulators restricted short selling of financial stocks. Many other countries followed suit. More recently, billionaire Elon Musk has been highlighting short-sells on social media, calling them one scam.

But in the more favorable opinion, shorts are seen as the ultimate Wall Street cop, spending countless hours of detective and forensic work, taking on powerful corporations and regulators, and exposing himself to potentially unlimited losses. Proponents say that in a world where the traditional equity research industry doesn’t have its back to provide selling advice to struggling companies and with passive investing an even greater role, Le Maire’s descendants are desperately needed.

Take the Enron accounting scandal, for example. Jim Chanos, the founder of hedge fund Kynikos Associates, helped uncover the fraud, driving the average fall from $ 79.14 per share in 2000 to December 2001, when it plunged to 60 cents. And just like last year, German regulators praised short sellers after initially banning them for exposing Wirecard AG, which filed for insolvency after it was found that EUR 1.9 billion ($ 2.3 billion) was missing in cash.

Read more: Wirecard Adds to the selection of wins from short sellers in Europe

New rulebook

Other observers are less sympathetic. Before the 2008 financial crisis, US regulators changed certain rules to make shorting easier, according to Brian Barish, Chief Investment Officer of Cambiar Investors. Some hedge funds used that as a tool to mistreat companies that were viable but needed capital. Insolvencies that were preventable followed and real people were injured, Barish said.

“I don’t think hedge fund books need help,” Barish said. “Let them taste their own medicine.”

For now, hedge funds that use tactical leveraged betting against companies for short-term gains are most at risk to their survival. They are expected to be selective, avoid busy transactions, borrow less and stay away from companies with high private investor participation. Most importantly, they can withdraw if necessary.

Peter Borish, chief strategist at Quad Group, predicts lower returns for such funds as they shy away from going downright short on cheaper stocks and making a faster profit. “If you’re looking for a short-seller to hit home runs, you’re more likely to get singles and doubles,” he said of the new outlook.

Other funds may choose to use discrete over-the-counter put options to place short bets as they do not need to be disclosed in regulated registrations. The Melvin Capital short films listed in their public documents helped make them a Reddit bro target.