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There are few less popular protagonists in financial markets than the short-selling hedge fund. And by extension, there are a few greater sources of schadenfreude for the companies they target than when these hedge funds' bearish bets violently blow up in their own faces. In recent weeks, short sellers who enjoy a difficult and lonely existence at the best of times have been suffering even more than usual.
On Wednesday, the smell of burnt fingers was wafting over the hedgy districts of Mayfair in Greenwich, Connecticut, after the heavily shorted Swedish industrial company Hexagon said it was considering selling itself, which sent its share price up by an excruciating 12%. Hedge funds, which had bet against 4% of Hexagon stock, according to market data, were forced to rush to buy back the shares to stem the losses on their trade. David Einhorn, a well-known short seller whose fund had sold short 0.7% of the company, would have had better mornings than when he woke up to the bad news. Only two years ago, his Greenlight Capital had made a large bet against Keurig Green Mountain Coffee roasters only to see the company be bought out at a very large premium.
Elsewhere, Carson Block of Muddy Waters, another famed short seller, last week reminded the world of the difficulties of his craft. Shares in the Hong Kong listed company he announced he was betting against at the SOHN Conference jumped by 17% after its management defended itself against his claims. Such mishaps are the occupational hazards of the professional short seller, and their travails are unlikely to elicit much sympathy. But for those who are relishing their current discomfort, they should also remember the important role these sorts of funds have played in uncovering corporate malfeasance and pricking bubbles in the past.
With equities repeatedly hitting new all-time highs, there have been few rewards on offer for specialised short sellers as the prolonged stock market rally has lifted the shares of both good and bad companies at the same time. But this state of affairs cannot last forever, and these currently bowed bears will eventually have their day. The best short sellers may not be invited to cocktail parties, but unfortunately for their enemies, they also have a very good record of eventually getting it right.
