{"id":564868,"date":"2021-03-03T14:54:12","date_gmt":"2021-03-03T14:54:12","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2021\/03\/03\/putting-the-shorts-on-trial\/"},"modified":"2021-03-03T14:54:12","modified_gmt":"2021-03-03T14:54:12","slug":"putting-the-shorts-on-trial","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2021\/03\/03\/putting-the-shorts-on-trial\/","title":{"rendered":"Putting the shorts on trial"},"content":{"rendered":"

<\/a> Are short sellers good or bad? <\/strong>They lost big at the start of 2021 as hordes of retail investors took to a Reddit forum to prop up shares, pulling off one of the most aggressive short squeezes<\/a> in history. More than just being a targeted assault on Wall Street elites that defraud the public, it meant short sellers will now have to constantly look over their shoulders as this newfound power of mns of ordinary Joes coming together threw the entire premise of shorting into disarray.<\/p>\n

Short-sellers definitely got their slice of Humble Pie this year. <\/strong>The GameStop frenzy saw a loss making, heavily shorted company's share price surge an astonishing 1200% in a little over two weeks. This led to at least<\/a> USD 5 bn in losses for hedge funds and investors that were taking short positions in this company alone. Short sellers lost more than USD 70 bn<\/a> in January alone. The impact was so immense that Citron Research<\/a>, which has been in the business of identifying promising shorts for 20 years, announced it will now only offer analysis for investors that go long. Melvin Capital, Carson Block, and other multi-bn hedgies also made u-turns as they lick their wounds from the GameStop mania.<\/p>\n

Politicians in South Korea, where short-selling is banned, are taking note.<\/strong> They\u2019re banking on the renewed distrust to convince regulators to extend the ban<\/a> and win over smaller investors ahead of special elections in April.<\/p>\n

The anti-shorts stigma isn\u2019t new. <\/strong>The first time<\/a> short sellers were painted as wrong-doers dates back to 1609, when Flemish merchant Isaac Le Maire tried to short the Dutch East India Company, driving down the company\u2019s stock price by spreading false information and rumors<\/a>. The company convinced authorities to outlaw the practice, arguing that those who profit from and call for lower stock prices are a menace to innocent shareholders. If they\u2019ve survived until now, isn\u2019t that (perhaps) an indication that there\u2019s some value to their work?<\/p>\n

Are short sellers really the bad guys? <\/strong>While \u201cfew tears are being shed<\/a>\u201d for hedge funds that profit from the demise of stocks, it\u2019s only sensible to give some credit to those that (methodically) attempt to pick fault in fraudulent businesses. By some accounts, it wouldn\u2019t be too far-fetched to say that a fair share of short sellers are unsung heroes of the global financial system.<\/p>\n

Fans of short selling would agree. <\/strong>They say it\u2019s a necessary and much-needed endeavour, helping to single out companies with a questionable existence. The most recent example in our collective consciousness is Wirecard, the once-high-flying German fintech outfit that was exposed<\/a> to EU regulators and public pension funds for bad accounting practices, with the help of short sellers<\/a>.<\/p>\n

Not convinced?<\/strong> Netflix\u2019s Dirty Money has a prime example of this in an episode<\/a> how short-sellers poked holes in Canadian pharma giant Valeant\u2019s acquisition-driven business model. There\u2019s also The China Hustle<\/a> (also on Netflix), which covers how short-sellers uncovered fraudulent SPACs bringing Chinese firms with fraudulent financials to US markets.<\/p>\n

Short-sellers also remind us of the importance of fundamentals<\/strong> as those that had paid attention and invested right seldom are in a position to be hurt by campaigns against companies targeted by shorts in the first place. They give an alternative view and help companies reach a fair value.<\/p>\n

Still not convinced? <\/strong>Maybe this Forbes piece can change your mind: If You Don\u2019t Like Short Sellers, Then You Wish Blockbuster, NetZero And Circuit City Still Existed<\/a>.<\/p>\n

If short sellers are that great, what\u2019s the fuss about? <\/strong>The main argument against them is that they contribute to market volatility. They also practice a risky art that\u2019s often leveraged with hefty debt, and a collapse of a large hedge fund would have far-reaching consequences<\/a>.<\/p>\n

And they\u2019re an easy pinata for the sins of the whole market: <\/strong>Short sellers weren\u2019t the only ones affected, and it\u2019s \u201cfar from\u201d clear if they\u2019ll be the first to tap out, Allianz Chief Economist Mohamed El Erian writes in an op-ed for Bloomberg<\/a>. The sellers were part of a triad, which also includes intermediaries (who are racing to protect themselves and are forced to \u201ccough up\u201d) and the retail traders themselves (who are now empowered like no other time in history), says El Erian. Even if some natural punch kicks one player out the game, regulators and politicians won\u2019t stay quiet for long. We can expect to see some form of \u201csmall investor protection, investment suitability criteria, margin limits, possible collusion and price manipulation, and market structure,\u201d adds the Egyptian-American guru.<\/p>\n

More on short-selling:<\/strong><\/p>\n