In any business transaction, be it financial, real estate or retail therapy, for every buyer there must be a seller. One can either sell something one already owns, or sell ahead of delivery to lock in the price. The latter is at the very heart of, and the reason for, the creation of futures contracts; so that farmers can fetch a guaranteed price for their estimated crop or herd.
Companies whose shares are listed on a stock exchange, and the exchanges themselves, make life a lot more difficult for those who want to sell short – meaning, to sell something one doesn’t as yet own.
Unsurprisingly corporate CEOs, whose bonus is now mainly paid in shares or share options in the company they run, cry foul. They then lobby the exchange to ‘do something’ about the pernicious short-sellers who are destroying value. Meanwhile the exchanges themselves are under pressure from politicians who dislike it when share indices drop as it reflects badly on their handling of the economy. It’s usually the weakest of these which crumble first and ban short selling.
This train of thought was set in motion by an in-depth interview by Harriet Andrew in FT Weekend (25/26 July) with Jim Chanos. The legendary short only hedge fund manager set up Kynikos in 1985 (named after the classical Greek word for ‘cynic’), his pitch being that he could identify a corporate disaster in the making; now some know him as the Darth Vader of Wall Street. According to Agnew, Chanos ‘has one of the best track records in the hedge fund industry. The long/short Kynikos Capital Partners fund gained 22 per cent per year over the last 35 years’.
Interesting that he states that one of the drawbacks of being a seller is that one ‘’put[s] up with weeks and months of misery, and you feel good for a few hours and days’’. This from the man who recently made about $100 million from a short position in Germany’s Wirecard. More surprisingly, he no longer sees a short as a mirror image of a long position. This ‘’because there is a lot of behavioural finance at work in the markets. The bull case is everywhere’’ with optimists taking over the asylum. ‘’So I do think it does take a certain peculiar personality to say ‘OK, here’s my facts and here’s the conclusions I draw’ from them.’’