In a Surprise Twist, Most Activist Shorts Are Up This Year

But short sellers including Muddy Waters and Citron Research are changing their approaches after the GameStop squeeze.

Carson Block, founder of Muddy Waters. (Michele Limina/Bloomberg)

Carson Block, founder of Muddy Waters.

(Michele Limina/Bloomberg)

After all the handwringing about short selling following the January GameStop squeeze that almost toppled hedge fund Melvin Capital, activist short sellers are back at the game — and doing quite well.

So far in 2021, activist shorts are in the black on 25 out of 32 target companies, according to Breakout Point, a data firm that tracks the short sellers. On average, the stocks are down 18.5 percent since the activists have made their pitches, Breakout Point’s Ivan Cosovic told Institutional Investor.

Muddy Waters’ short on electrical vehicle company XL Fleet Corp., which it unveiled Wednesday on the video channel, is the latest to hit the market. The stock had fallen almost 25 percent by the market’s close on Thursday and was down another 8 percent near the end of trading on Friday.

“We conclude that the real green technology at XL is duping investors into throwing money at this company through a collection of exaggerations, half-truths, and mistruths,” Muddy Waters said in the report, which it said was in part based on information from former employees.

In a press release, XL Fleet responded by saying that “the report contains numerous factual inaccuracies, misleading statements, and flawed conclusions,” but did not elaborate.

[II Deep Dive: Not Everyone Thinks Short Selling is Dead]

Muddy Waters founder Carson Block told II that the turmoil around GameStop — which he believes was an exacerbation of technical trends that began pummeling short sellers last year — led to some changes in the way his firm approaches short selling.

The activist short seller had largely de-risked his portfolio and was sitting on the sidelines immediately following what he called “the GameStop madness.”

“We’ve had this report on the shelf,” Block said. “We were waiting for things to settle down.”

Before issuing the report on XL Fleet, Block took a look at Reddit — a social media forum he had not been following before the GameStop fracas. “We checked to see that [XL Fleet] was not one of these Reddit favorites,” he said. “If a Reddit mob forms, if you’re not able to get out of the way quickly, that’s a huge problem.”

XL Fleet also came to the public market via a SPAC, or special purpose acquisition company — which Block said also made it a good target for technical reasons.

“SPACs don’t have as much of a headwind from a technical perspective,” he said. They are new publicly traded companies and as a result are not included in indices and ETFs, meaning they are “not benefiting from passive flows in a big way,” he noted.

They also don’t tend to have a high short interest nor a tightly held float, according to Block, who added that after a SPAC closes a deal with its merger partner, or deSpacs, many of the initial hedge fund investors tend to sell their shares.

In the end, though, the activist short seller is still being more cautious. “We’re sizing things more conservatively,” he said. “We have calls to hedge our position.”

Muddy Waters’ short on XL Fleet isn’t the best performer this year, nor is it the only SPAC that is on the Breakout Point list. And all of them have benefited from the overall market downturn.

Wolfpack Research’s short on Ehang Holding, a Chinese company developing an autonomous flying air taxi that Wolfpack called “a stock promotion destined to crash and burn,” tops the list. The stock had fallen 71 percent by Thursday’s close since the report was released on Feb 16.

In response, EHang said it “strongly believes that the report contains numerous errors, unsubstantiated statements, and misinterpretation of information.”

Another SPAC has also been a big winner for the shorts. Clover Health, which was merged with one of Chamath Palihapitiya’s SPACs, was the fourth-best activist short this year. The stock was down about 48 percent since Hindenburg Research issued its report on February 4, according to Breakout Point.

The report noted that Clover, a Medicare advantage plan, is under investigation by the Department of Justice but had not disclosed the matter to investors.

In a lengthy Medium post defending itself, Clover said it “concluded that the fact of DOJ’s request for information was not material and was not required to be specifically disclosed” in filings to the Securities and Exchange Commission.

Clover also disclosed that it was under investigation by the SEC following the Hindenburg report.

Hindenburg was the first of the activists to put out short research following the attack by the Reddit forum WallStreetBets on the short sellers of GameStop.

But Hindenburg did not take a short position in the stock, saying that it was publishing the report to show the value of short sellers — and their research — in the market. Hindenburg’s Nathan Anderson told II that he still has no short position in the company. (It has since released short reports on two other companies that it has shorted.)

Meanwhile, one of the worst performing activist shorts this year remains GameStop, which Andrew Left’s Citron Research had targeted in a short report on Jan. 19. That drew the wrath of the WallStreetBets members and led Left to say he would no longer be writing short activist reports.

GameStop, despite retreating from the stratospheric heights it attained during the short squeeze, was still up 21 percent since Left’s report as of Thursday’s close.