Activist short sellers such as Daniel Yu of Gotham City Research, Nathan Anderson of Hindenburg Research and Carson Block of Muddy Waters Capital are getting more attention, as they increasingly use social media to push well-timed claims of weak fundamentals, improper accounting or outright fraud at publicly traded companies. These short sellers often present their findings as research, but they’re also interested parties that stand to gain if the target company’s stock drops. While some accusations by short sellers have held up and prompted regulatory or legal action in recent years, others have proved unfounded and tainted by ulterior motives.
Most traditional short selling — that is, placing a bet that a stock price will decline — is done by hedge funds and institutional investors to cushion their investments against falling stock prices or to bet that shares are overvalued. Activist shorts, by contrast, research companies to find targets that they allege have dodgy business or accounting practices, spread the word (sometimes anonymously) and, if all goes as planned, send the shares lower. It’s a risky strategy. A short seller’s potential profit is capped because the stock can’t go lower than zero, but losses could be infinite if the stock keeps moving higher, which is what’s been happening to most of the market since October 2022. Although activist shorts have been calling out companies for decades, their numbers have swelled with the rise of social media as a platform for disseminating theories and analysis.
