Short seller Hindenburg nabs tiny gains off $173 billion carnage

The surprise is that Anderson, 39, who runs tiny Hindenburg Research with a team of roughly a dozen researchers, probably reaped relatively small profits from his fights.

By Katherine Burton

Gautam Adani, Jack Dorsey, Carl Icahn. Nate Anderson has picked them off one by one.

In mere months this year, he erased as much as $99 billion of their combined wealth while knocking $173 billion off the value of their publicly traded companies. In an era when prominent short sellers have retreated from the limelight — fretting lawsuits, short squeezes and government probes — the deft researcher has emerged as the gutsiest bear around. Allies say he’s risking civil suits, physical attacks and potentially even overseas arrest.

The surprise is that Anderson, 39, who runs tiny Hindenburg Research with a team of roughly a dozen researchers, probably reaped relatively small profits from those fights.

Take his report on May 2, accusing Icahn’s holding company, Icahn Enterprises, of overvaluing assets. Within four weeks, the stock’s plunge erased $17 billion of the billionaire’s wealth. Yet the combined gain for all investors who shorted the shares before the report would have been about $56 million if they timed their exits perfectly, according to data from S3 Partners. And that’s not counting the cost of setting up the bets.

In going after Adani’s empire, Anderson shorted bonds. Veterans steeped in that market say it would’ve been so difficult to build a sizable position that he probably notched a smaller gain.

And his bet against Dorsey’s payments venture, Block Inc., may have been even more modest, based on market data.

While Anderson declined to comment for this story, the few interviews he has previously granted and his talks with confidants — who agreed to speak on the condition they not be identified — make clear that money isn’t his main motivator.

The investor, who lives in a two-bedroom luxury apartment he rents in Manhattan, has said he makes a “very good living.” What drives him is exposing what he sees as misbehavior and knocking down companies he deems offensively overblown. One competitor calls it the classic mindset of a short seller: a compulsion to understand how the world is screwed up and call it out.

This year has brought Anderson an unusual amount of attention. In January, he rattled international markets by going after the Adani Group — 10 publicly traded companies run by the man who was then the world’s fourth-richest. Adani Enterprises, the conglomerate’s flagship, lost about half of its market value in days. In late March, Anderson shorted Block, which tumbled more than 16 per cent by the end of that week. In May, he took aim at Icahn Enterprises, watching the stock plunge as much as 59 per cent that month.

All three reports — vigorously disputed by the companies they targeted and the men who run them — met or surpassed Anderson’s typical impact on prices. Since 2020, Hindenburg has taken aim at about 30 companies, knocking their stocks down about 15 per cent on average in the day that followed.

Credit: Bloomberg Photo

“If you have a track record of being trustworthy then that builds a lot of credibility and the market reacts to that,” said Ian Appel, a business professor at the University of Virginia’s Darden School who has studied hedge funds and activist short selling.

Though losses later eased in all three cases, the stocks remained lower as of last week’s close than before Hindenburg’s reports.

Infinite Downside

Activist short sellers are, putting it mildly, controversial.

The mere appearance of research from a prominent bear can send a stock into a tailspin before the market has time to debate its merit, which can be especially hard on small investors who can’t react quickly. Companies and shareholders have increasingly cried foul, prompting US congressional hearings. Concerned about market manipulation, the Department of Justice has swept up communications between short sellers in recent years, prompting some, such as Citron Research’s Andrew Left, to pull back from the business. None has been accused of wrongdoing.

Anderson is now an outlier of that shakeout. After a few below-the-radar jobs on Wall Street, he tried earning a living by submitting tips to the Securities and Exchange Commission’s whistleblower program, hoping to collect rewards from successful federal investigations. But he struggled to make ends meet. So he published more reports online. By early 2020, markets were softening and Hindenburg’s impact and reputation were growing. Yet even if it reaped millions on trades, that’s small by the standards of major Wall Street firms. And it’s pennies compared with the dollars lost by shareholders.

What makes short selling such a hard, almost ridiculous, way to earn money is the topsy-turvy nature of the trade. It usually starts with finding a pile of shares to borrow and sell, with the aim of buying them back later for less to book a profit. The upside is capped at 100 per cent and the downside is potentially unlimited. Companies have mounted more vigorous responses in recent years, squeezing short sellers in the market or taking them to court. The broader market, meanwhile, has generally been buoyant. One bearish investor described it as sadness upon sadness upon sadness.

Then, in 2021, retail stock jocks famously organized on message boards to drive up heavily shorted names like GameStop, squeezing bears and costing some billions. Gabe Plotkin’s Melvin Capital Management ultimately shut down.

There’s also bad luck. In June, Carson Block, one of the most prominent short sellers, saw his campaign against Chinook Therapeutics Inc. — initially a winning bet — turn into a loser when Novartis AG agreed to buy the company for as much as $3.5 billion. Block alleged Chinook had obscured trial data for atrasentan, a drug for rare kidney diseases that he predicted wouldn’t get US approval. Chinook’s CEO later said he expects to have final-phase study results for atrasentan this year and that he’s “optimistic we're going to see good data.” In a conference call last month, Novartis also touted the drug’s potential.

‘Largest Con’

Anderson has shown that he has the skills of a good short seller: He writes compelling reports and uses retail-friendly platforms like YouTube to lay out his case. To go after Dorsey’s Block, he stitched together video clips — a series of rappers mentioning Block’s Cash App as their preferred way to pay hit men, buy drugs or conduct fraud. Another rapper, Nuke Bizzle, was later sentenced to six years in prison after admitting to participating in a scheme to cheat a Covid-era relief program. Prosecutors said some proceeds were extracted using Cash App.

Block has called Hindenburg’s description of its operations “factually inaccurate and misleading,” pointing to its growing spending on systems that prevent bad actors from using its platforms. The company vowed to work with securities regulators and explore legal options. The stock eventually recovered only to fall anew over concerns about future earnings. It’s down 13 per cent since Hindenburg’s report, contrasting with the 15 per cent gain in the broader KBW Nasdaq Financial Technology Index.

Adani, which Anderson accused of widespread corporate malfeasance, was the most audacious short and the one his peers said they can’t imagine pursuing. Some posited that if Anderson was a decade older, he might not have dared.

Hindenburg’s report accused Gautam Adani of “pulling the largest con in corporate history,” claiming his conglomerate engaged in accounting fraud and stock manipulation. The billionaire’s business issued a 413-page response, calling the report “nothing but a lie” and a “calculated attack on India” while threatening legal action. Though shares of Adani Enterprises pared losses, they’re down 34 per cent this year.

Bearish investors run higher risks going after targets outside the US, where protections for free speech are often weaker, and some markets ban short-selling techniques. In India, defamation can be a criminal offense, and shorting stocks is typically done only through futures. Some of Anderson’s contemporaries say they would worry about the potential for prosecution in India, a red notice from Interpol, or even the possibility of creating a geopolitical incident given Adani’s perceived close ties to Prime Minister Narendra Modi.

It’s impossible to pinpoint how much Anderson earned on the Adani short, given he has said only that he shorted US-traded bonds, non-Indian traded derivatives and non-Indian-traded reference securities. One trader calculated that given the relatively small number of US dollar Adani bonds, he could have shorted about $50 million of the instruments — at most. The company with the largest issuance, Adani Electricity Mumbai, fell about 14 cents in the week following the report.

But borrowing bonds for a classic short sale can be problematic for prominent bears, because in debt markets it’s customary for the borrower to reveal their name as part of the transaction. Who would want to lend their holdings to someone famous for driving down prices?

Anderson could have shorted stock futures through Singapore, but only one Adani Group company — Adani Ports & Special Economic Zone — has futures trading there, and the volume is thin. Open interest in those derivatives on the day Anderson announced his short was worth less than $50 million.

One market participant suggested Anderson could have gone to a non-Indian bank and entered a swap agreement, with the bank essentially placing a position in Indian traded futures on his behalf. That would have put more money to work.

Brass Knuckles

Some short sellers in the US won’t go after companies overseas because of concern that executives may find sympathetic ears in their local governments, triggering probes. In some locales, organized crime is endemic. Short sellers say threats of physical violence and death are common.

Fahmi Quadir, a hedge fund manager who has bet against companies outside the US, said she was hit by a masked man wearing brass knuckles while she was walking her poodle in Manhattan. Another said he used to sleep with the windows open at his rural home so that he’d be awakened if someone came to harm him in the middle of the night.

But in the US, threats of legal action are de rigueur.

The Icahn short posed a different kind of risk. The billionaire personally owns a roughly 85 per cent stake in his company, meaning that only 15 per cent is available to borrow. That paltry amount substantially raises the cost of shorting. Before the Hindenburg report, borrowing costs amounted to about 4 per cent of the market price, and afterward it rose to almost 17 per cent, according to S3 Partners. Most stocks can be borrowed for about 30 basis points — or 0.3 per cent.

Usually, short sellers line up their trades bit by bit in the days and weeks before unveiling their research. At Icahn Enterprises, the number of shares that were sold short — known as short interest — mounted for a few weeks. If one investor was behind that run-up — borrowing and selling roughly 1 million units in the partnership — they could have generated around $30 million in gains by the time the price hit a low on May 25.

Credit: Bloomberg Photo

Carl Icahn pushed back on Hindenburg’s assertions about his company, calling them “self serving” and “inflammatory.” While Icahn’s move last month to restructure borrowings temporarily eased shareholders’ concerns, the stock tumbled 23% on Friday after the company slashed quarterly payouts by half. The price is down 50% since Hindenburg’s initial report.

Meanwhile, Hindenburg made clear that it sometimes continues betting against companies long after unveiling its research — even if such wagers can be costlier and riskier once the market knows a bear is afoot.

“We predicted that ‘Icahn Enterprises will eventually cut or eliminate its dividend entirely, barring a miracle turnaround in investment performance,’” Hindenburg wrote Friday on the social media platform X. “We remain short.”

`Obvious Scam’

Market data show the run-up in bearish bets against Block was more modest.

In fact, short interest in that stock declined through the first half of March before reversing course only days before Hindenburg’s report, increasing by roughly 260,000 shares. That flurry of wagers would have generated a gain of less than $5 million by the time the stock price touched a low in May. Trading in put options, meanwhile, was relatively thin.

Credit: Bloomberg Photo

It’s also possible that Anderson could have teamed up with a so-called balance-sheet partner on some trades, having them line up bets based on his research and then giving him a portion of the gains. A 20% cut is fairly normal, according to fellow short sellers.

In June, Anderson launched his fourth campaign of the year, going after Tingo Group Inc., which says it provides a marketplace for farmers in Nigeria. For short sellers, relatively unknown small-cap companies are more usual fare, with stocks that can react quickly.

In Tingo’s case, the short interest climbed for weeks before Anderson labeled the business an “exceptionally obvious scam with completely fabricated financials.” Tingo promptly said it “categorically refutes all the allegations.”

The news barely grabbed headlines, but the stock tumbled 48% on the day of Anderson’s report and 62% within a week — dipping below $1. The short interest that piled up beforehand would have generated $24 million.