In this short post, we will look into short selling and an infamous Hindenburg Research company that makes trades against certain companies that it thinks will fail!
What is short selling?
What is Short Selling and How Does it Work?
Put simply, short selling is betting on a stock’s price to fall. A more formal definition is as follows – it is a strategy where an investor borrows shares of stock from someone else and sells them. The investor hopes that the stock price will go down in value so they can make a quick profit by repurchasing the shares at a lower price and returning them to the original owner, sounds easy right? However, it is a risky strategy because if the stock price goes up instead of down, the investor will lose money.
Some funds or research organisations focus on short selling and one really interesting one is Hindenburg research. Hindenburg Research LLC is an investment research firm focusing on activist short-selling, founded by Nathan Anderson in 2017 and based in New York City.
Hindenburg Research generates public reports via its website that allege corporate fraud and malfeasance. The reports are based on investigations of a target company for six or more months, which involves going through the company’s public records and internal corporate documents and talking to its employees. Once the report is complete, it is circulated to Hindenburg’s limited partners, who, together with Hindenburg, take a short position in the target company. Hindenburg takes profits if the target company’s share price declines.
The Impact of Hindenburg Research’s Reports on High-Profile Companies
Hindenburg Research’s reports have had a significant impact on the companies they have targeted. For example, in September 2020, Hindenburg Research published a report on the Nikola Corporation that included allegations of the company being “an intricate fraud built on dozens of lies.” The report argued that its founder, Trevor Milton, was responsible for much of the fraudulent activities. Following the report’s release, Nikola’s stock dropped by 40%, and a Securities and Exchange Commission (SEC) inquiry was opened. While Milton initially disputed the allegations, he later resigned from his position as Executive Chairman and was eventually found guilty of wire and securities fraud. In November 2020, Nikola stated that they had “incurred significant expenses as a result of the regulatory and legal matters relating to the Hindenburg Report.”
Another example is the Clover Health report, released in February 2021. Hindenburg Research claimed that the company neglected to inform investors about it being under investigation by the Department of Justice. The report also argued that billionaire stock promoter and entrepreneur Chamath Palihapitiya neglected his due diligence and misled investors as he took the company public via a special purpose acquisition company. Hindenburg disclosed that it has no short or long positions in Clover. Immediately following its publishing, Clover Health dismissed the report’s accusations and stated it received a notice from the SEC.
Short-Selling and Financial Markets: Controversy and Debate
Hindenburg Research’s reports have also focused on companies like Adani Group, Kandi, and Lordstown Motors. In January 2023, Hindenburg revealed that it had short positions in India’s Adani Group and flagged debt and accounting concerns. Concurrently, Hindenburg released a report claiming that the Adani Group “has engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. Soon after the report’s release, Adani Group companies experienced an acute decline in share prices. Another reason why it is so risky to invest in a single company, we really don’t know what is happening behind the scenes.
Hindenburg Research’s work is controversial, with some questioning their motives and methods. However, the firm defends the practice of short-selling, which they believe plays a critical role in exposing fraud and protecting investors.
Short-selling has been ever so popular in recent years due to high-profile short-squeezes in companies like GameStop (search for them on our website and your web browser of choice) and AMC Entertainment. Short-squeezes occur when short-sellers are forced to buy shares to cover their positions, causing the stock price to rise rapidly. Short-sellers who are unable to buy back the shares they borrowed at a higher price lose money. It is also possible to short other assets like ETFs too! However short selling is generally only applicable to professional investors. It’s more aggressive than selling a share if you own it, which is the option available to most retail investors like you and me.
Hindenburg Research’s reports have raised questions about the role of short-sellers in financial markets. Short-sellers are often criticised for their negative impact on companies, which can lead to job losses and lower share prices. However, proponents argue that shorting firms makes markets more efficient and reliable for regular users.
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