Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: People go to Miami for a lot of reasons, winter Sun,
Speaker 2: the Cuban food retirement. But bloombergs Denis at Tekova recently
Speaker 2: traveled to South Florida for something a little bit different.
Speaker 1: So I went to a conference in Miami, which is
Speaker 1: one of the biggest hedge fund conferences is Hedge Fund Week.
Speaker 2: Hedge Fund Week is a can't miss event for a
Speaker 2: select group of investors who manage billions of dollars. Looking
Speaker 2: at the agenda, there is a lot of what you
Speaker 2: might expect at a gathering of hedge fund managers on
Speaker 2: Biscayne Bay, a yacht brunch followed by a yacht lunch
Speaker 2: and then you guessed it, a yacht cocktail hour.
Speaker 1: And there were many panos with many big names, and
Speaker 1: one of the most exciting panos was getting together a
Speaker 1: lot of the investors who were featured in The Big Shirts. Obviously,
Speaker 1: probably the most emblematic movie for shorts hours.
Speaker 2: The Big Short. That's the film the director Adam McKay
Speaker 2: made based on the Michael Lewis book of the same name.
Speaker 2: It's about a group of investors, including Steve Eisman. They
Speaker 2: bet against the early two thousands housing bubble and made
Speaker 2: a killing as the rest of the world was plunged
Speaker 2: into the Great Recession.
Speaker 1: The expectation of the panel was the next big short.
Speaker 1: It was just like, what have you been doing? What
Speaker 1: are you looking at? What is the next big thing
Speaker 1: that is going to break? And I also came into
Speaker 1: that panel with the expectation of, Wow, I'm gonna like,
Speaker 1: I'm gonna break news about Steve Eisman's announcing a short.
Speaker 2: They need to settled in. Sadly, it was not a
Speaker 2: yacht panel. It was just in a cramped room with
Speaker 2: beije wallpaper and slat blinds, in other words, the perfect
Speaker 2: place to break some news.
Speaker 1: And then we went in into the panel and a
Speaker 1: lot of them were like, well, we're not really shorting
Speaker 1: many things, like Steve Eisman said, I'm actually more of
Speaker 1: a long oriented investor now and I'm happier, I'm blissful,
Speaker 1: I have more time with my.
Speaker 2: Family, spending time with his family, bliss going long. This
Speaker 2: was not what she expected Steve Eisman to say. He
Speaker 2: made his name as a short investor, and the surprises
Speaker 2: kept coming. As Denitza started talking to some of Eisman's
Speaker 2: rivals to other short sellers. She called up Andrew Left,
Speaker 2: one of the world's best known short sellers, and he
Speaker 2: told her short sellers like him are a dying breed. Now,
Speaker 2: short sellers have never been beloved on Wall Street.
Speaker 1: We had the former New York Stock Exchange head describing
Speaker 1: them as Unamerican and ekey.
Speaker 2: But don't go cheering their demise just yet. Today on
Speaker 2: the show, is this the end of the line for
Speaker 2: short sellers? I'm David Gerra, and this is the big
Speaker 2: take from Bloomberg News. Before we jump in, let's start
Speaker 2: with the basics with what short selling is.
Speaker 1: Yeah, in simple terms, shorts would be the opposite of going.
Speaker 2: Along, all right, let me tease that out just a
Speaker 2: little bit more. When an investor goes long, it's because
Speaker 2: he has reason to believe the price of a security,
Speaker 2: whether it's a stock, a bond, or some other asset,
Speaker 2: is likely to go up. He's betting on that. When
Speaker 2: an investor goes short, he's betting that a business or
Speaker 2: an asset is overvalued and its price is going to
Speaker 2: go down. And Bloomberg's de needs at Tekova says this
Speaker 2: has been going on for hundreds of years.
Speaker 1: It's actually a practice that nothing new. Has been around
Speaker 1: for a very long time, and it's something that's always
Speaker 1: been heavily scrutinized. The way it has played out is
Speaker 1: eventually there is a market crush, and the easy people
Speaker 1: to blame have been short servers. Even Napoleon himself has
Speaker 1: famously said that they're an enemy of the state as
Speaker 1: they add more volatility and then it's harder for him
Speaker 1: to finance his wors. So this has been a theme
Speaker 1: for hundreds of years.
Speaker 2: So they don't generally have a great reputation.
Speaker 1: They don't have a good reputation yet.
Speaker 2: To be a short seller means you're essentially betting on
Speaker 2: the price of an asset falling or going down. There
Speaker 2: are a lot of ways you can do this, but
Speaker 2: the main way big investors do it is by borrowing
Speaker 2: shares in a company, selling them at a high price,
Speaker 2: then hopefully buying them back at a lower price before
Speaker 2: returning them. But there's a key difference between going long
Speaker 2: and going short.
Speaker 1: The big difference with long is if you buy something long,
Speaker 1: obviously your losses are capped.
Speaker 2: You can bet that a company's share price will rise,
Speaker 2: but if you're wrong, well, there's a limit on how
Speaker 2: much money you'd lose if it were to fall. Stock
Speaker 2: prices can't go below zero. But if you bet the
Speaker 2: company's stock will fall and it goes up instead.
Speaker 1: The downside is unlimited. So obviously a really tough place
Speaker 1: to be in.
Speaker 2: So there's a lot of risk, but the upside can
Speaker 2: be big. If a company's stock goes down, lose its value,
Speaker 2: goes bankrupt when nobody else thought it would, you can
Speaker 2: make a lot of money. But and there is a
Speaker 2: butt here, the situation that made you a lot of
Speaker 2: money is likely to be very bad for the business
Speaker 2: you've bet against and for anyone who's invested in it.
Speaker 1: If you think about investing in general, the majority of
Speaker 1: population hope that stocks will go up. So we all
Speaker 1: invest our pensions, our brokerage accounts, and you know, we
Speaker 1: hope the SNP reaches a new highs. And then there
Speaker 1: is a group of people who comes out and releases
Speaker 1: a report and says, well, we actually hope this drops,
Speaker 1: and like it drops one hundred percent and the company
Speaker 1: crumbles and you know, it goes into bankruptcy. So it's
Speaker 1: just like a very contrarian point to be in the
Speaker 1: first place, and it's it's hard to be to be
Speaker 1: going against the masses. It is hard to be going
Speaker 1: against people who have put their pension is an s
Speaker 1: and P. Five hundred. It's hard to tell them that,
Speaker 1: you know, I've released the short report, so I hope
Speaker 1: this company goes into bankruptcy.
Speaker 2: Betting on bankruptcy can be a bit unsavory, but Denitza
Speaker 2: says short sellers have played an essential role.
Speaker 1: If we go back to academic literature, they're actually proven
Speaker 1: to be healthy for markets. There are numerous papers showing
Speaker 1: that short selling activity has been shown to be an
Speaker 1: a break on bad corporate behavior. It has shown that
Speaker 1: it keeps the prices of companies with questionable finances in check. Then,
Speaker 1: in theory, short sellers could come in and say, hey,
Speaker 1: this company finances are really bad. It doesn't make sense
Speaker 1: for it to go up two hundred percent, so let's
Speaker 1: short it.
Speaker 2: This is exactly what happened in the two thousand and
Speaker 2: eight housing crisis. Banks and mortgage lenders were selling bad loans,
Speaker 2: everyone was buying. The markets were flying high, but a
Speaker 2: small number of investors thought this was too good to
Speaker 2: be true and decided to bet against them. Against everybody
Speaker 2: really and when the housing market collapsed, it made those
Speaker 2: short sellers seem like oracles in a market steeped in deception.
Speaker 2: They were brave enough to see things clearly and they
Speaker 2: won big And in the wake of the housing crisis,
Speaker 2: short selling looked really good.
Speaker 1: You know, you can imagine after two thousand and eight,
Speaker 1: this was a very glamorous industry that was doing very well.
Speaker 1: They predicted so many things, they were getting big gains,
Speaker 1: they were getting a lot of inflows.
Speaker 2: People wanted to invest with short sellers. Dditza says the
Speaker 2: amount of money going into short selling tripled after two
Speaker 2: thousand and eight, reaching a peak of nearly eight billion dollars.
Speaker 2: But since then there's been a complete reversal. Investments in
Speaker 2: short selling have basically fallen by half.
Speaker 1: That industry has shrunk so much, and this is happening
Speaker 1: as the broader hedge from the industry is growing out
Speaker 1: a crazy pace. It's treat both in the last ten
Speaker 1: years or so.
Speaker 2: Deniza spoke to Jim Chenos, one of the most legendary
Speaker 2: short sellers on Wall Street, who recently closed his hedge
Speaker 2: fund because of how tough it's become to be a
Speaker 2: short seller.
Speaker 1: He told us, you cannot raise capito for short selling.
Speaker 1: You just cannot do it now. So you can imagine
Speaker 1: if Jim Channas himself cannot raise capito, who can raise
Speaker 1: capital for those strategies.
Speaker 2: After the break? What's driving this downturn in short selling
Speaker 2: and what the return of memestocks means for their demise
Speaker 2: Over the last five months, Bloomberg's denitze at Tekova has
Speaker 2: spoken to some of Wall Street's best known short sellers
Speaker 2: about what's led to a dramatic downturn in this kind
Speaker 2: of investing. What if they tell you about why this
Speaker 2: is happening, why we're seeing this decline in short selling,
Speaker 2: what's their read on what's going on in the marketplace.
Speaker 1: There are so many forces that are threatening short selling,
Speaker 1: Like the most basic one, it's just like we've been
Speaker 1: in a relentless boom market. Like just imagine holding any
Speaker 1: type of short bed when markets go up all the time.
Speaker 1: It's just like the basic just doesn't work along with
Speaker 1: that relentless rally. How do you explain to investors that
Speaker 1: it's worth going into short selling when you can buy
Speaker 1: in video, when you can buy tech stocks have in
Speaker 1: saying games, Why would you go into this super sophisticated,
Speaker 1: complex risky approach that also has unlimited losses potentially, So
Speaker 1: it's hard to sell. It's a tough pitch.
Speaker 2: As we've mentioned, short sellers make money when markets go down,
Speaker 2: stocks tumble, or company's tank, and for the most part,
Speaker 2: over the last decade, everything everywhere has been going up. Well,
Speaker 2: all that good news has been devastating to short sellers.
Speaker 1: People have been predicting a very hard recession. People have
Speaker 1: been predicting a big spike in bankruptcies, and we really
Speaker 1: haven't seen that much of a severe or any big
Speaker 1: impact on the economy. So that's part of the problem
Speaker 1: that after years of big growth, stocks are still doing well,
Speaker 1: the economy is doing well, So there hasn't been any
Speaker 1: big event that short sellers could potentially predict.
Speaker 2: And Denitza says it's not the only force working against them, and.
Speaker 1: Of course retail traders. This is fresh new trauma for
Speaker 1: short sellers and it's a big one.
Speaker 2: Retail traders aka dumb money aka meme stocks. This was
Speaker 2: the whole social movement, the cultural phenomenon that really took
Speaker 2: off in twenty twenty one, when an online army of
Speaker 2: redditors and small time investors started snapping up millions of
Speaker 2: shares in companies like game Stop and AMC in a
Speaker 2: direct attack on the hedge funds that have been shorting
Speaker 2: those stocks. Investors like Keith Gill, also known as Roaring
Speaker 2: Kitty I, wanted to drive the share prices of those
Speaker 2: companies sky high, making themselves rich and forcing those short
Speaker 2: sellers to eat huge losses.
Speaker 3: GameStop is one of the most compelling asymmetric opportunities in
Speaker 3: the market today, well based on prevailing sentiment the market
Speaker 3: in popular culture. Many think it's a foolish investment, but
Speaker 3: everyone's wrong. It's take the big short again, more like
Speaker 3: the big short squeeze this time right.
Speaker 2: These investors drove the share price of game Stop up
Speaker 2: more than one thousand percent at one point, causing catastrophic
Speaker 2: losses for the companies that had shorted the stop. And
Speaker 2: even though game stops share price eventually fell, Denitza says
Speaker 2: the meme stock movement exposed a vulnerability of short selling.
Speaker 1: I think that was one of the biggest milestone moments
Speaker 1: for short sailers. This is when we started seeing all
Speaker 1: those closures and the names that are left Now we
Speaker 1: have really seen them changing their strategies. Some of them
Speaker 1: have gone along only some of them that have a
Speaker 1: lot more long exposure now to mitigate those losses. There
Speaker 1: is even the person, the people element of this of
Speaker 1: just like the public scrutiny has been back at full force.
Speaker 1: There have been movies, social media. Those people are the
Speaker 1: enemy of the people. So definitely it's been a game changer.
Speaker 2: Since twenty twenty one, Denitza says most short sellers have
Speaker 2: changed their strategy and now tend to avoid well known
Speaker 2: companies that online memestock investors might rally behind. Even though
Speaker 2: Keith Gill, better known as Roaring Kitty, is back in
Speaker 2: the news this week having posted a screenshot of his
Speaker 2: supposed one hundred million dollars stake in game Stop, there
Speaker 2: were now fewer people betting that the stock will fall.
Speaker 2: But one big consequence of the twenty twenty one frenzy
Speaker 2: was a flurry of increased scrutiny from regulators.
Speaker 1: After twenty twenty one, there was a big campaign. It
Speaker 1: emerged that many activists, shortsaillers were under investigation by the
Speaker 1: Justice Department by the Securities and Exchange Commission for Market
Speaker 1: manipulation so a lot of those short sellers live in fear,
Speaker 1: in fear that they may be investigated. On top of
Speaker 1: all those agencies chasing short sellers, there are governments around
Speaker 1: the world who are notoriously not happy about short sellers
Speaker 1: and are introducing bands or short term regulation. We have
Speaker 1: seen that in China, we have seen that in South Korea.
Speaker 1: So there is just too much going.
Speaker 2: On, runaway markets, meme stock movements, more scrutiny from regulators.
Speaker 2: It is not easy being a short seller these days.
Speaker 1: If you ask most of the short sellers, this is
Speaker 1: probably the worst and most difficult here they've had in
Speaker 1: quite some time. Can they recover from this? Potentially they
Speaker 1: are adjusting their thinking about tweetail traders, being active and
Speaker 1: generally in investing. After a strategy has been shrinking and
Speaker 1: has had a really bad time, we have often seen
Speaker 1: a little bit of revival. We're seeing a lot of
Speaker 1: younger new entrance in the field who maybe are not
Speaker 1: making as much money and like raising big capital and
Speaker 1: going to pension funds, but are releasing those reports and
Speaker 1: are very passionate about the industry. So it continues to
Speaker 1: be a thing. So maybe that big drop, that big
Speaker 1: demise we have seen in the last few years. Maybe
Speaker 1: at some point there is some kind of renaissance.
Speaker 2: A renaissance, So it might be a little early to
Speaker 2: send short selling to a retirement community in South Florida.
Speaker 2: After all, it was a moment just like this back
Speaker 2: in two thousand and eight when markets were on a
Speaker 2: tear and nobody could imagine betting against them. That the
Speaker 2: few who did made their fortunes, and even those who
Speaker 2: say they're sitting this one out are rethinking their plan.
Speaker 2: On Monday, short seller Andrew Left, the one who told
Speaker 2: Dnizza that they're a dying breed, phoned her up and
Speaker 2: told her he had taken a small short position on
Speaker 2: GameStop because it's fun to trade. This is the big
Speaker 2: take from Bloomberg News. I'm David Gura. This episode was
Speaker 2: produced by David Fox. It was edited by Stacy Vanick Smith,
Speaker 2: Sam Potter, and Sid Verma. It was mixed by Alex Segura.
Speaker 2: It was fact checked by Thomas lou Naomi Shaven and
Speaker 2: Kim Gittleson are our senior producers. Our senior editor is
Speaker 2: Elizabeth Ponso. Nicole Beamster Bor is our executive producer. Sage
Speaker 2: Bauman is Bloomberg's head of podcasts. If you liked this episode,
Speaker 2: make sure you subscribe and review The Big Take wherever
Speaker 2: you get your podcasts. It helps people find the show.
Speaker 2: Thanks so much for listening. We'll be back tomorrow