The world of investing is both complex and simple at the same time.
What makes it simple are its basics – invest your money in a business and profit from it. Its complexity lies in so many options, strategies, tactics, and ways to do that. While most common people are familiar with said fundamentals of the industry, those who are not part of it can’t even imagine how many tricks of the trade exist.
Today, we have decided to cover one particular investment strategy called short selling, or simply shorting, and to list those who are best known for utilizing it. For the sake of those who are not knowledgeable about short selling, we’ll start first by providing a simplified description. Basically, to understand what it means to short a stock one should think about the opposite of buying a stock. When an investor buys a stock, which is often referred to as going long, they bet on its price going up, but when they decide to short a stock, they bet on its price going down. How do they profit from declining prices? Simply, an investor just borrows a stock it expects to go down, sells it before its price drops, then buys it back at a lower price and returns it, earning the difference. So, this is basically a bet against the stock. Even though it may sound simple, this investment strategy is very risky and it is recommended only to experienced investors. Short selling carries a higher risk in terms that you can lose more money than you invested if a stock price jumps high enough (instead of going down as you anticipated), whereas when going long, in the worst case scenario, you can lose only the amount you’ve invested.
According to Activist Insight’s Activist Short Selling report published in May 2018, activist short selling has become an influential part of the market in the last couple of years, in spite of decreasing number of activists short selling campaigns. The report further suggests that there may be various causes of this decline, such as a difficult market environment and lack of resources for comprehensive research these strategies usually require. Nonetheless, 70% of campaigns ran in the previous years managed to achieve profits in the same week of its launching. Interestingly, as per the report, those earnings were not equally distributed regarding marketing strategy, market cap, or accusation type, and what’s more, anonymous short sellers have managed to achieve higher one-year campaign returns, bringing back 13% on average, versus 3% popular short sellers returned. This is, perhaps, due to the structure of social media websites that favor new and mysterious industry players.
When it comes to types of short sellers campaigns that are most profitable, big business frauds, stock promotion frauds, and accounting frauds are at the top, returning from 11% to 13% in one week of the campaign on average. In the long run, fraudulent stock promotion is the most profitable, bringing back 41% in one year on average, followed by claims of a company’s product being futile, which result in a return for a short seller of 32% on average (in one year period). Big business frauds return 23% on average, over the course of 12 months as well. Accounting frauds, on the other hand, lag far behind, with the average return in the same period of only 2%. Companies that are mostly targeted in recent years, mainly belong to healthcare, technology and services sectors, and are of small, mid and micro market caps.
Let’s take a look at some of the most popular names in the industry – 25 biggest activist short sellers in the hedge fund world:
25. Mako Research
Mako Research is one of those anonymous short sellers we have been talking about in the intro part of the article. He publishes his investment thesis on Seeking Alpha, and his profile currently has 1,018 followers. Mako Research mainly focuses on small companies in tech and biotech sectors, with its latest report from May 23, targeting T2 Biosystems, Inc. (NASDAQ:TTOO).