The original story appeared on Barron’s on March.15th, 2014.
Traditionally, hedge funds profited on proprietary research and fought to maintain that edge as long as possible. Lately, however, some short-sellers have been freely posting investment research on the Internet. Are they crazy? If a recent working paper by Alexander Ljungqvist and Wenlan Qian, respectively of New York University and the National University of Singapore, is any indication, they might be crazily successful.
Photo Credit: William Waitzman for Barron’s
The pair studied 332 reports by shorts like Citron Research, Bronte Capital, Asensio & Co., and 14 others. The first-day market impact of reports from research outfits Muddy Waters and Alfred Little produced an average decline of 18%. In the three months following publication, the share prices of 113 U.S.- listed companies targeted by the short-sellers fell by an average of 22%, net of market movements, and by 57% over 12 months. Even after accounting for short-sale fees, the scholars figured the shorts that went public made a three-month profit of 18%.
One fund they studied was Kerrisdale Capital, which says it made its investors attractive amounts of money by exposing fraudulent U.S.-listed Chinese companies in 2010 and 2011. Now the New York firm mainly covers U.S. firms. Recent Kerrisdale research on Unilife (ticker: UNIS), a York, Pa.-based pharmaceutical firm, cited a history of missed deadlines and a murky supply chain for the firm’s short position. Unilife stock fell from nearly $5 on the report date to about $4.25 over the next few days. “We generally had a good experience sharing our research with the public,” says Kerrisdale CEO Sahm Adrangi.
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