Two prominent short sellers — Kynikos Associates founder Jim Chanos and Safkhet Capital’s Fahmi Quadir — have recently been holding Zoom meetings with members of Congress and staff in hopes of warding off future regulations on short selling.
The meetings with Chanos and Quadir were arranged by the Managed Funds Association, according to Quadir, who said that “people are thinking seriously about this idea of disclosure of short positions,” which many hedge funds oppose.
Such a change wouldn’t just affect the small group of dedicated short sellers, whose numbers have diminished in recent years. It would also force long/short equity hedge funds, with almost $1.1 trillion in assets under management, to make their short positions public.
Hedge funds now must disclose their long U.S. stock holdings, as well as any short positions that are made via listed put options, in quarterly filings with the Securities and Exchange Commission. While European regulators have forced funds to also disclose some short positions, that has not happened in the U.S.
The notion of such disclosure came up briefly last month in the GameStop hearing held by the House Financial Services Committee, when Melvin Capital CEO Gabriel Plotkin was asked if there should be more disclosure of short sales.
Plotkin sidestepped the question, saying, “It’s not for me to decide, but if those are the rules, I’d certainly abide by them.”
Notably, Melvin had become a target of Reddit retail investors after it disclosed listed put options in GameStop in its SEC filings.
According to Quadir, she and Chanos began talking to Democratic and Republican members of the House Financial Services Committee, and their staff, ahead of the GameStop hearing.
The 30-minute Zoom calls are being organized by the MFA, a hedge fund industry lobbying group. MFA staff members have also been on the calls.
Quadir, who said the MFA contacted her about being involved in the effort, estimated that at least ten meetings have been held with “various stakeholders,” which also includes people from the Securities and Exchange Commission. These meetings have been going on for about a month. Eventually, she said the short sellers will be talking to senators and their staff as well.
“The more we can drive home what we do, the less likely they are to take any extreme measures when things change in the market,” Quadir said.
The worry is that short sellers will be blamed for a market crash, as happened in 2008. But Quadir said the “only pushback” against the shorts so far is about disclosure of their positions.
The Safkhet Capital founder said she has explained in the meetings that companies will retaliate against short sellers if the companies know their positions, detailing how she has been subjected to such attacks.
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Even before Quadir went public with her criticisms of shorting Wirecard, the German financial firm that collapsed last summer in scandal, the company had hired private surveillance firms to follow her and was trying to hack her emails, she said.
Quadir said she believes Wirecard knew she was short because her name appeared publicly on FOIA databases about the company. “If they had seen public short selling disclosures, they wouldn’t even have had to jump through all the hoops and hurdles of hiring investigators and doing research on me to figure out what I’m doing,” said Quadir. “It would all just be handed to them on a silver platter.”
In an emailed statement, Bryan Corbett, president and CEO of the Managed Funds Association, said the “purported benefits” of hedge funds disclosing their positions are “unproven at best.”
“MFA has long held the position that public disclosure of individual positions is neither beneficial to investors nor market integrity,” he said. “Fundamental short research exposes frauds such as Enron, Valeant, and Wirecard, and issuer retaliation against short sellers is but one of many significant reasons why a disclosure regime is harmful and unnecessary. Clear negative impacts on market liquidity, price discovery, and efficient capital formation demonstrate harm far beyond retaliation.”
While the hedge fund industry successfully fended off a similar proposal for public disclosure of short positions following the 2008 financial crisis, not everyone is on board this time around.
One dedicated short seller told Institutional Investor that he would welcome such disclosure, arguing that most of the opposition comes from long/short equity hedge funds. One reason these firms don’t want to disclose their short positions, he said, is the impact it would have on their access to corporate managements.
Long/short equity funds accounted for more than 30 percent of total hedge fund industry assets of about $3.6 trillion at the end of 2020, make them the biggest single strategy, according to Hedge Fund Research.
Chanos declined to comment.
