The Reddit-Gamestop saga earlier this year reminded us how short sellers are often frowned upon as if they were up to something immoral if not illegal. But here’s a story about one short seller who on the contrary sees short selling as a way to change the world for the better. Carson Block may not be in the Jim Chanos league but brings in a greater sense of purpose to shorting companies, especially the fraudulent ones. Block shot to fame a decade ago when his company Muddy Waters published research on a Chinese company called Sino-Forest, exposing its accounting fraud and then saw the stock unravel. Michelle Celarier writes this entertaining piece on Block’s history including a troubled childhood which she seems to attribute his rage filled approach to cleaning up the corporate world by uncovering frauds and in the bargain enriching himself by shorting them.
“Explaining the rage that has driven his short-selling career takes Block back to his childhood.
“It’s always been kind of an inch deep. At my core is some amount of rage that will never disappear,” he says. “The parts of my life later on when I succeeded were really about learning to control it and then harness it effectively. It’s like, ‘Wow, I built a business off that.’””
And a successful one at that:
“…eight of the companies he exposed as frauds have been delisted from stock exchanges. Two others settled charges with regulators.
Not all of Block’s short campaigns have worked out, of course. Yet over the past five years, Muddy Waters has produced an annualized return of roughly 19 percent — and that’s after a 2.5 percent management fee and a 30 percent performance fee. It gained about 15 percent last year, when the broader market rose 18.4 percent. In 2021, Muddy Waters is already up close to 6 percent.
…Block runs a small firm — its assets are now around $260 million — but punches above his weight in influence. He has his detractors, but he is admired by billionaire hedge-fund managers and activist short-sellers alike.
For example, Pershing Square Capital Management CEO Bill Ackman swore off short selling after his bruising battle with Herbalife, saying the “brain damage” wasn’t worth it. As for Block, Ackman says, “I’m a fan. He does great research.”
Others see Block as a role model. “I wouldn’t have found a career in short activism if Carson hadn’t blazed the trail,” says Nate Anderson, whose Hindenburg Research became well known last year for its explosive exposé of electric-truck maker Nikola Corp.
Block, says Anderson, isn’t just “messing” with people for fun. “He enjoys holding truth to power. He’s going after people who are running scams and crooked management teams and their supporters, whether it be investment banks or auditors who are earning handsome fees to look the other way.”
But his detractors are everywhere, especially in Wall Street.
““Everyone knows GSX is a fraud,” says Block. “The problem is the hedge-fund players who decided to squeeze the shorts.”
In late March, GSX shares tanked, a victim of the massive liquidation of Hwang’s portfolio, creating a fair amount of schadenfreude at Muddy Waters. Notably, the big investment banks, known to have extended Archegos so much leverage, refused to do business with Muddy Waters, according to Block.
One denial came years ago from Credit Suisse, whose prime brokerage salesman had called Block while he was at the hospital awaiting the birth of his first child. “It was the first time I ever heard the sentence, ‘The reputation risk committee has denied us doing business with you,’” he recalls.
(Credit Suisse, which says it lost $4.7 billion during the Archegos liquidation, was the lead underwriter for the GSX IPO.)
Muddy Waters is still short GSX, which is now down more than 50 percent this year..”
On why he reckons shorting is more fulfilling than just going long:
“…he still thinks the excitement from making money on the long side is “hollow.”
“I mean, what did I feel good about? Honestly, I felt good about making money, right? Whereas on the short side, the best part emotionally about doing what I do occurs in the research process, because you’re solving puzzles. It’s like I know these guys are fucked up, but I’m trying to figure out how they’re doing this. Why exactly they’re doing it. And then when you find that key information or you solve a puzzle, that’s the best it ever gets,” Block says.”
Whilst Marcellus is likely to remain a long only house, some of us can see what Block is getting at, thanks to our past avatars in the sell-side.
“Explaining the rage that has driven his short-selling career takes Block back to his childhood.
“It’s always been kind of an inch deep. At my core is some amount of rage that will never disappear,” he says. “The parts of my life later on when I succeeded were really about learning to control it and then harness it effectively. It’s like, ‘Wow, I built a business off that.’””
And a successful one at that:
“…eight of the companies he exposed as frauds have been delisted from stock exchanges. Two others settled charges with regulators.
Not all of Block’s short campaigns have worked out, of course. Yet over the past five years, Muddy Waters has produced an annualized return of roughly 19 percent — and that’s after a 2.5 percent management fee and a 30 percent performance fee. It gained about 15 percent last year, when the broader market rose 18.4 percent. In 2021, Muddy Waters is already up close to 6 percent.
…Block runs a small firm — its assets are now around $260 million — but punches above his weight in influence. He has his detractors, but he is admired by billionaire hedge-fund managers and activist short-sellers alike.
For example, Pershing Square Capital Management CEO Bill Ackman swore off short selling after his bruising battle with Herbalife, saying the “brain damage” wasn’t worth it. As for Block, Ackman says, “I’m a fan. He does great research.”
Others see Block as a role model. “I wouldn’t have found a career in short activism if Carson hadn’t blazed the trail,” says Nate Anderson, whose Hindenburg Research became well known last year for its explosive exposé of electric-truck maker Nikola Corp.
Block, says Anderson, isn’t just “messing” with people for fun. “He enjoys holding truth to power. He’s going after people who are running scams and crooked management teams and their supporters, whether it be investment banks or auditors who are earning handsome fees to look the other way.”
But his detractors are everywhere, especially in Wall Street.
““Everyone knows GSX is a fraud,” says Block. “The problem is the hedge-fund players who decided to squeeze the shorts.”
In late March, GSX shares tanked, a victim of the massive liquidation of Hwang’s portfolio, creating a fair amount of schadenfreude at Muddy Waters. Notably, the big investment banks, known to have extended Archegos so much leverage, refused to do business with Muddy Waters, according to Block.
One denial came years ago from Credit Suisse, whose prime brokerage salesman had called Block while he was at the hospital awaiting the birth of his first child. “It was the first time I ever heard the sentence, ‘The reputation risk committee has denied us doing business with you,’” he recalls.
(Credit Suisse, which says it lost $4.7 billion during the Archegos liquidation, was the lead underwriter for the GSX IPO.)
Muddy Waters is still short GSX, which is now down more than 50 percent this year..”
On why he reckons shorting is more fulfilling than just going long:
“…he still thinks the excitement from making money on the long side is “hollow.”
“I mean, what did I feel good about? Honestly, I felt good about making money, right? Whereas on the short side, the best part emotionally about doing what I do occurs in the research process, because you’re solving puzzles. It’s like I know these guys are fucked up, but I’m trying to figure out how they’re doing this. Why exactly they’re doing it. And then when you find that key information or you solve a puzzle, that’s the best it ever gets,” Block says.”
Whilst Marcellus is likely to remain a long only house, some of us can see what Block is getting at, thanks to our past avatars in the sell-side.
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