‘It’s bittersweet….Short sellers put up with weeks and months of misery, and you feel good for hours and days.’ – That’s what famed short seller Jim Chanos quipped in an interview to the Financial Times, when asked about the estimated $100 million in profits his fund had made from shorting German fintech company Wirecard, that turned out to be a fraudulent company.

This bittersweet feeling appears to be reflected in Nate Anderson’s decision to shutter the firm he founded, Hindenburg Research. While from an Indian context, one could argue that his allegations against Adani Group remain unproven, giving some the chance to take potshots, this does not by any means take away his stellar overall record, in which the hits far outnumber the misses.

Successful and genuine short seller success stories play out in a pattern as exemplified in Mahatma Gandhi’s famous quote – ‘First they ignore you, then they will laugh at you, then they will fight you, then you will win.’ This is how it played out for short sellers of Enron, the US Housing Market during the 2002-07 bubble and many more. Of course, many get wiped off just before victory is around the corner, like Julian Robertson, who was forced to liquidate his fund – Tiger Management after his short bets on overvalued technology stocks during the dotcom boom kept losing money. The irony, though, is that the liquidation happened in March 2000, just days before the dotcom bubble burst.

Given this, it’s hard to dismiss Nate Anderson’s explanation of the actual reasons for shuttering the fund. While there is rife speculation in India that there is more to it than meets the eye since this is happening just days before Donald Trump takes over as President, and he is doing this to avoid a joint US-India investigation, that sounds silly. For how would closing a firm grant immunity against any past misdeeds, if there were any?

Setting the record straight

Nate Anderson’s letter on closing down his firm was met with delight by many in the investment community. In a world where many believe asset prices can go up for ever, short sellers are party poopers. They often face flak for profiting when others are losing money. But this reflects a fundamental misconception on the important role they play in free markets and capitalism.

To begin with, any profit is in some way, someone else’s loss. Aren’t investors in healthcare and hospital stocks profiting from the serious ailments of common people and the money they are losing to save their lives? Aren’t investors in defence stocks profiting from war and terror or at least the threat of it? Giant corporations like Walmart and Amazon and there are many in India too, that have grown their businesses by gaining market share and obliterating small and medium businesses and impacting the livelihood of its employees. The entire futures and options trading and intra-day trading is built on one party profiting from his/her counter party’s loss.

There will be a lot of defence to counter the above points – all the businesses serve a need in the economy and free competition is good. Short sellers would say the same thing. They serve the need in capital markets to fight market excesses, bubbles and accounting frauds. Of course some amongst them could be unscrupulous, but how is it different in any other field?

Whether it was the dotcom bust and consequent recession, or the bursting of housing bubble that left thousands of home owners on the streets and also brought global financial markets to its knees - they all reflect excesses that got too big and in turn caused destruction. Short sellers tried to fight it, with a profit motive of course. However, terming short sellers as those who profit from other’s misery, is like saying in a game of cricket a batsman pelting the ball, is profiting from the bowler’s misery.

That is how capitalism and free competition works. As long as no law or regulation is broken, there is nothing to critique here.

Hindenburg – Adani duel ends in a draw

As much as Hindenburg reaped rich success in its attack against many of the global companies it targeted, its duel with the Adani Group did not end that way. One could say, it has ended in a somewhat draw. When compared to January 2023 when the report was released, Adani Group businesses have grown substantially. Group company profits are significantly higher today. While leverage remains a concern in some companies like Adani Green, overall, the balance sheet of group companies are better today than two years ago. Adani Group fought back hard and had its way.

One factor that made the allegations against Adani Group less impactful is that it involved aspects outside the company (allegations of stock price manipulation, violation of certain laws, etc) rather than on the business or accounting side. This was a big departure from the typical Hindenburg reports that focus on accounting frauds and misrepresentations.

So why a draw and not a win for Adani? The Hindenburg attack managed to significantly dent the bloated share prices of companies like Adani Total Gas, Adani Green, and Adani Transmission where the shares today languish at 60-85 per cent below peak levels. Of course some like Adani Power and Adani Ports are trading significantly higher, bucking the attack.

As we said when the report was first released in January 2023 - When a seasoned short seller takes on one of the mightiest Indian corporations, it is a case of the irresistible force meeting the immovable object paradox.

Published on January 16, 2025