Hedge-Fund Research: Transparently Short


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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