Short Sellers, Villains or Victims?

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    Short selling has never been an easy trade. It takes guts to do it, it is not very likely to succeed, and when it does, it might result in the public’s hatred, or at the very least squeamishness. Lately, however, short sellers must be feeling positively besieged, fending attacks from woke Reddit activists and business leaders, alongside those from the established investment community. Take, for instance, the former CIO of Japan’s Government Pension Investment Fund, Hiromichi Mizuno, one of the most outspoken long-term critics of the “short-termism” of short sellers, who recently joined Tesla’s Board of Directors. He and Tesla’s CEO, Elon Musk[1], seem to be united in their hatred of short sellers, among other issues.

    Are short sellers the villains that they are painted to be on social media, though? Coming to their rescue, the Alternative Investment Management Association (AIMA), for one, lobbies hard to convince the public that responsible and ESG investing are not reserved to long-term buy-and-hold strategies exclusively.

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    Short sellers themselves use positive examples to show how they contribute to society by providing much-needed liquidity to financial markets and serving as a reality check during periods of extreme optimism.  The risks of short selling being as enormous as they are, investors who engage in this activity need to be extra diligent with their research. In the process, they are bound to uncover unethical behaviour that is not generally known to the public.

    Alas, it seems that the campaign is failing and the hostile attitude towards them is accelerating. We wouldn’t be witnessing such massively acclaimed attacks on them otherwise, like the latest bout of schadenfreude during the GameStop short squeeze.

    The extraordinary losses inflicted on short sellers are not an isolated case, restricted to GameStop either, but part of an unprecedented “sudden dramatic outperformance by the most shorted stocks,” according to John Authers at Bloomberg. Rather than rejoicing at the short-squeezers’ success, he argues, we should be getting worried as it inevitably leads to “less creative destruction, and more capital continuing to go to companies that cannot put it to good use.”

    Let us, therefore, hope that both short selling as a strategy and the short-sellers practising this onerous trade will survive the latest storm and eventually get the recognition they deserve, whenever they deserve it. Hopefully, the sustainability community will learn to judge them based on their actual impact rather than on the unfortunate reputation that precedes them.

    To understand the debate better, have a look at our recent analysis.

    [1] On Twitter, Musk has creatively dubbed the U.S. Securities and Exchange Commission the “Short-seller Enrichment Commission” and called for making shorting illegal.


    Picture by fxquadro

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.
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