In Tough Year for Short Sellers, Muddy Waters Pulls Off Big Gains

Activist short seller Carson Block achieved the feat despite a treacherous last half of 2020.

Carson Block (David Paul Morris/Bloomberg)

Carson Block

(David Paul Morris/Bloomberg)

Carson Block, the founder of Muddy Waters Capital, likes to talk about what a screwed up year 2020 was — on many levels. But even as most short sellers gasped for life, Muddy Waters ended the year up a net 15 percent, according to an investor.

It was the fifth year Muddy Waters’ hedge fund posted a double-digit gain, which launched in 2016 and has managed such performance during one of the longest bull markets on record. The fund has produced an annualized return of roughly 19 percent — and that’s after a 2.5 management fee and a 30 percent performance fee. Muddy Waters’ gains came during a year when the broader market, as measured by the Standard and Poors 500 Index, ended the year with an 18.4 percent gain.

Muddy Waters’ returns far outdo those of most short-biased hedge funds. This year, the strategy had lost 47.59 percent through November, according to the HFRX Equity Hedge: Short Bias Index.

Block declined to comment on his fund’s performance. But he acknowledged that the firm had a strong performance in the first half of the year but struggled during the second half — when the market zoomed, and many shorts went parabolic.

“We just fought all the second half of the year to get back to where we were,” he told Institutional Investor. One big change involved making adjustments to his fund in what was “much more of a trading environment,” he said. Muddy Waters hired a full-time trader who started in August.

“We were able to manage risk and be nimble and move things around intraday,” he said.


Block’s newfound trading focus came after one of his big China short bets, GSX Techedu, the online education company, fended off a number of short seller reports, including one by Muddy Waters in May and an earlier Citron Research report by Andrew Left in February.

GSX jumped almost 11 percent on May 18, the day Muddy Waters released its report claiming that “at least 70 percent of GSX’s users are fake, and we think it’s quite likely that at least 80 percent of its users are fake.”

The stock, which opened at $29.70 that day, went as high as $141.78 during the summer but has been trading down since October and was below $47 on Thursday.

GSX’s ability to fight off short sellers is a new pattern in Chinese stocks, said Block.

“Ten years ago, when I began doing this, the Chinese guys were really unsophisticated in the market,” he recalled. After Muddy Waters put out a short on a Chinese company, “they would just be like deer in the headlights getting run over.”

“Things are really different now. I mean these guys are among the most sophisticated players in the market in terms of understanding the technicals,” he said.

So far Muddy Waters has lost money on its GSX short. “But we hope to make it back when it collapses,” Block added. He’s not predicting when that will happen, though.

Block’s latest Chinese short, Joyy, has suffered something of a similar fate. The day he called it a “near-total fraud” with fake users, the stock tanked. It has since regained some of those losses but is still down about 20 percent since before the report came out.

Both companies have denied Muddy Waters’ claims.

Overall, more than half of all activist short calls were in the red at the end of the year, according to Breakout Point, which tracks them. The prices on 97 stocks that were subject to a short attack are higher than they were as of the end of the day before the report, compared with 80 for which the prices are lower.