Four years ago, short seller Carson Block, the founder of Muddy Waters Capital, found himself in the crosshairs of the federal government. The far-reaching investigation initially targeted dozens of people but ended up with a securities fraud indictment of only one of Block’s peers: Citron Research’s Andrew Left, whose federal trial is slated for April.
While the investigation sent a chill over the short selling world, it was part of a broader malaise. The meme stock craze earlier that year had already led several pundits to proclaim the death of short selling, which had been under siege by a decade-long bull market. Since then, the bodies have continued to fall. In 2023 veteran short seller James Chanos, the most famous of them all, shut down his Kynikos hedge fund. And in January the widely respected Nate Anderson of Hindenburg Research abruptly announced he was leaving the business following a string of successful short campaigns against such high-profile targets as electric truck maker Nikola, whose CEO Trevor Milton was convicted of fraud in 2023. Adding insult to the short seller injuries, Milton became one of the first high-profile felons to obtain a pardon from President Trump this year.
But Block, who was eventually cleared of any wrongdoing by both the Securities and Exchange Commission and the Department of Justice, is doing just fine. This year, he appears to be running the top performing short-dedicated hedge fund. His flagship fund is up more than 20 percent through September, according to an investor. And that’s at a time when the S&P 500 hit new highs, gaining more than 15 percent year to date.
The success — and the endurance — of Muddy Waters illustrates one short seller survival technique: loudly proclaiming a target and the thesis behind it, typically causing the stocks to drop precipitously. The strategy involves covering most, if not all, of the short soon after and continuing to trade around it. Block calls it risk management.
Other short sellers have managed to do well by going long as well as short. For example, Eduardo Marques, who was feted for his Wirecard short while running the short book at Valiant Capital, in 2021 opened his own long-short hedge fund firm called Pertento Partners. Pertento is up around 14 percent this year through September, according to an investor. (Marques declined to comment.)
Going long is a classic way short sellers insulate themselves against a rising stock market, even though they say that most of their research energy is spent on their short positions. Block, who started a long-only quantitative momentum share class for the firm’s employees called Left Curve, said, “You could think of us as having two departments. So there’s the department of carrying too much, and that’s activist short selling, and then there’s the department of not carrying at all, and that’s Left Curve.”
Block said Pertento’s Marques is one of the few long-short managers doing “reasonably deep work” on shorts these days. “Fewer and fewer people are finding it worth their while to do that,” he told II. “Markets are so [screwed] up that the only way you can actually make money generally as a short seller is as an activist short seller and [by] trading around stuff the way we trade around it.” He said Muddy Waters has also profited on some other names that it has not publicly revealed, often as a balance sheet provider to other activist short sellers.
This year, the fund has published only two short activist reports, on FTAI Aviation and AppLovin. “We obviously had some very big day one wins” on the two names, he said. AppLovin fell 20 percent the day of Muddy Waters’ report — but rebounded and was up more than 70 percent for the year by late October. (The SEC recently launched an investigation into the company, looking at some of the issues Muddy Waters and two other short sellers have highlighted.)
FTAI fell 27 percent the day of Muddy Waters report but is up almost 50 percent since then.
Both FTAI and AppLovin denied the short seller claims.
The practice of covering shorts soon after an activist report has been controversial at times — and it is related to the government’s case against Left, who is accused of 17 counts of securities fraud related to his trading stocks in opposition to the opinions he has published, both long and short. The government said in the indictment that the short seller “created the false pretense that Left’s economic incentives aligned with his public recommendation.” Left has denied the accusations of fraud, and his peers agree with him.
Block, meanwhile, has introduced another fund, called Domino, that holds the positions longer. It’s doing pretty well, too, gaining about 12 percent this year through September, according to an investor.
“The other thing is we run market neutral. So we hedge all of our short positions with factor baskets,” Block said.
Despite Block’s success, this year has been “devastating” for activist short sellers when looking at the performance of their targets, said Ivan Ćosović at Breakout Point, a data provider. Activists have published 117 reports, and the average target was up 27 percent since the reports as of mid-October, he said.
“It has been a tough year to be the shop writing 50-page PDFs about corporate malfeasance while meme traders treat every short-seller’s accusation like a ‘buy the dip’ signal,” Ćosović said.
The risk management approach that Muddy Waters has pioneered could be driving some of that, suggested one short seller. “Everybody gets the joke now,” he quipped. Even quants are said to be buying the activists’ stocks once the names become public.
Another fund that has performed well despite the massive runup in the prices of its short targets is Sahm Adrangi’s Kerrisdale Capital Management, a long-short fund that gained more than 15 percent through September.
Kerrisdale has written seven short activist reports this year, and the stocks of five of those targets are up — some by a lot. Since Kerrisdale’s reports, D Wave Quantum, for example, has soared 370 percent, while IonQ was up 250 percent this year as of October 9, according to Breakout Point. Both are quantum computing stocks, the latest fad in a frothy market. But Kerrisdale has also put out reports on two stocks where it has gone long, and those are up more than 10 percent each. “Our longs have been more profitable than shorts,” said Adrangi, who said he is still short those two quantum computing names.
“You can’t run a short fund anymore without accepting that this is the table stakes now. That the market just goes up,” said Orso Partners founder Nate Koppikar. “This feels like 2021 where it felt just as miserable and terrible and then a few variables changed” in 2022. As II previously reported, Koppikar’s dedicated-short fund gained more than 70 percent in 2022 as the tech and growth stocks he had shorted tanked.
The traditional short selling model requires patience (and patient investors).
“If you’re going to be really right on something, you’re probably going to be early,” said Koppikar. “We’re living through a period where people perceive abundance to be significant and their perception is probably wrong.”
One area where Koppikar has been proven right this year is private equity. He has been short the publicly traded PE management companies for some time, and their stocks are all down double-digits this year.
Other short sellers have been stung by targeting such buzzy areas as the aforementioned quantum computing, AI, and data centers — all of which have soared despite what short sellers say are underlying problems in many of the names. Quantum computing stocks got a big boost in October when President Trump said the U.S. would take a stake in them.
But perhaps the short sellers’ biggest problem was believing that Trump’s tariffs were a “watershed” moment, said one hedge fund manager.
“If you were to believe that all hell was going to break loose because of the Trump tariffs, then you just added a little bit of beta and that was enough to really kill your returns for the year,” the hedge fund manager said. “Since then everyone’s been trying to play catch up. It was a massive rally. People got caught short, and then it took a while to change their minds.”
Clint Huff, the senior investment officer overseeing hedge fund investments at the Texas Tech University System, agreed with that assessment. “Outside of what we saw in April with the tariff announcement, the market’s been up and to the right the entire year. It’s incredibly tough” for short sellers.
Huff, who previously was a short seller at Oasis Capital, argued that this market is “setting up for a very good environment” for the shorts. As an allocator, he invests in activist short sellers and thinks they help with diversification.
“Imagine me at an endowment with a large allocation to multi-managers and it’s done great,” he said. “But what if they are running for the exits at once, covering their longs and shorts at the same time to bring down leverage because of crowding?” That’s when short sellers will prove their mettle, he believes.
