Sophos Capital Management, the largest dedicated short selling firm in the world as recently as a year ago, is scaling back its hedge fund business, according to people familiar with the plans.
The move by founder Jim Carruthers — widely considered a legend in the business — comes as short sellers faced one of their worst years on record. Short-biased funds lost 47.59 percent through November, according to the HFRX Equity Hedge: Short Bias Index. This year isn't looking any better. The Goldman Sachs “most shorted” index of stocks was already up 13 percent in 2020 and more than 200 percent over the past year.
Carruthers did not respond to a request for comment, and his funds’ performance details weren’t publicly available. Menlo-Park-based Sophos reported $1.16 billion in regulatory assets under management, six separate hedge funds, and nine employees at the end of 2019. That made it larger than even Jim Chanos’ Kynikos Associates, which had slipped below the $1 billion mark by that time.
An individual familiar with Carruthers’ plans said the short seller had been telling people he was winding down some positions since late last year, and some employees have been looking for jobs. It's unknown how long it could take to unwind some of the positions, but people close to the situation said that he is not shutting the firm down.
Carruthers launched Sophos in 2014 with about $200 million, including a seed investment from Yale University’s endowment. The move by Yale led other university endowments to invest in short sellers, according to one short-biased hedge fund manager.
Representatives for Yale did not respond to a request for comment.
Unlike short activists — such as Muddy Waters’s Carson Block — who have gained prominence over the past decade by promoting their views publicly, Carruthers has remained very much behind the scenes, sometimes letting more vocal short sellers or journalists make his work public.
He is widely respected by other short sellers for his efforts at uncovering fraud and malfeasance. For example, one person noted that Sophos was the first to target Insys Therapeutics, the maker of the deadly fentanyl opioid, which was a money-losing short for years. In 2020 Insys’s founder was sentenced to five and a half years in prison after his conviction in a racketeering scheme that bribed doctors.
“Without Carruthers’ dogged effort, Insys could still be going today,” said one veteran short seller. “It’s an awful time to be a short seller because it’s a nightmare having to explain to people that you’re losing money. It’s an absolute nightmare out there.”
Short-biased hedge funds are in a particular bind because their investors expect them to remain short — despite the difficulties.
“You have to stay in business, but if you have a mandate to always be short, basically you’re playing the circular firing squad game, and it’s impossible,” said one former hedge fund manager at a long-short equity fund.
Before starting his own fund, Carruthers had headed the short book at Dan Loeb’s Third Point. Earlier in his career, he worked for the Feshbach brothers, who were noted short-sellers in the late 1980s.