Are Short-Sellers the Dark Knight of the Financial Markets?

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Just last week, Anonymous Analytics (AA) yet again issued another short research report on a company called Tianhe Chemicals (HKSE: 1619), noting a strong sell on the stock.

 

The Chinese company was accused by AA of fabricating its revenue and earnings figure with a share price valuation of HK$0.00, an expected return of -100%.  Shares in Tianhe Chemicals dropped 4.9% after the claim was published.

 

What are Short-Sellers?

Dedicated short-sellers such as Anonymous Analytics and Muddy Waters Research; Hedge funds such as Pershing Square Capital and Greenlight Capital in a way help increase corporate transparency and attempt to create symmetrical information for investors through exposing business frauds. These research firms and fund houses tend to have a strong team of forensic auditors, lawyers and experienced analysts who are able to conduct deep-dive investment research on potential fraudulent companies. Moreover, these guys conduct extensive on-the-ground due diligence in order to attempt exposing such companies.

 

Are These Research Always in the Interests of Investors?

There is no doubt that short-sellers have the expertise in exposing business frauds. However, we do have to understand that short-sellers are also motivated by monetary gains as some of them would have already taken a short position before publicly announcing their lengthy report. Even if short-sellers claim they are a non-profit organization, they may have friends who might already take on positions. Investors who may wish to short the stock after the report might well be too late into the game. Moreover, these short-sell reports tend to be sensationalized in order to create temporary market panics for these short-sellers to take profits.

 

Short-selling is a tough game as compared to taking a long (buy) position on a stock. With unlimited exposure to losses and limited potential to gains (since stocks can only hit 0), short-sellers face a huge risk if things do not go their way. Moreover, it might take years for a company to be fraudulently exposed. This incurs additional financing cost of shorting the shares of the company if the stay is too long. In addition, as most short-sellers come from the developed markets such as the US, they have to understand that shorting a stock in Asia is a different ball game as companies tend to be either family-owned or state-owned, which have a strong sponsor to provide financial backing.

 

Value in Action

There is always good information in the reports short-sellers publish, however investors should remain objective and discern these reports being published.

 

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

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