In an unexpected development shaking the financial world this week, Hindenburg Research, a well-known short-selling firm that has taken on titans such as Carl Icahn and Gautam Adani, announced its shutdown.

Short-selling is a polarizing trading strategy — there are strong arguments in support of (market efficiency, fraud detection, risk-hedging, etc.) as well as against (malicious manipulation, short-termism, exacerbating volatility, etc.) the practice. Unsurprisingly, responses to Hindenburg’s shuttering were incredibly varied, ranging from glee and amusement, to respect and sadness:

While the nature of his profession is controversial, Hindenburg founder Nate Anderson’s farewell note really moved me, where he made heartfelt comments about the stressful nature of short-selling and the impact this had on his life:

“It has also been rather intense, and at times, all-encompassing. I often wake up from my dreams because I’ve thought of a new investigative thread to pull on in my sleep, or an edit that clarifies a point I didn’t realize I was troubled by during the day. Or from the general pressure of it all. We are not fearless—we just have faith in the truth and hope it leads us down the right path… I probably could have had it all along had I let myself, but I needed to put myself through a bit of hell first. The intensity and focus has come at the cost of missing a lot of the rest of the world and the people I care about.”

Clearly short-selling is not for the faint-hearted. Rather than debating the merits or short-comings of the practice, I wanted to outline three key reasons why I believe it’s more challenging to build an enduring investing career as a bear vs being a bull in the market:

“As of 2024, we routinely observe annualized shorting costs above 100% for hundreds of individual U.S. equities, and we occasionally observe stocks with costs above 1,000%. We haven’t seen anything like this since 1931… Perhaps someday, shorting a stock will be as simple as buying a latte. Until that blessed day occurs, we must survive in a dystopian system with hundreds of horrendously overpriced stocks, but nothing much that anyone can do about it.”

From investigating corporate misconduct and fraud (such as in the case of Enron) to tempering fads (such as during the dotcom bubble), short sellers play an important role in a well-functioning financial ecosystem. As a VC who sits more in the “bull” camp, I have immense respect for those who chose to undertake short selling as a profession, especially the “bears” who do this work well and in an upright manner. Higher downside risk, higher costs, higher psychological stress… all of these factors can lead to quick burnout for short sellers, but I hope that investors build on Hindenburg’s work and continue to take on this worthy and necessary endeavor.

Thanks for reading! Subscribe for free:

This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of her employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future.

Leave a Reply

Sign Up for TheVCDaily

The best news in VC, delivered every day!