It was short sellers who unmasked Enron’s industrial-scale frauds, and more recently Wirecard’s. It was an activist fund, Glaucus, that brought down forestry group Quintis and another group of short sellers who identified the flaws in the accounts, business model and valuation of a UK professional services firm that Slater and Gordon acquired that saw the Australian law firm effectively collapse.
Existing investors and aspiring buyers aren’t motivated to look for fraud, overvaluation or flawed strategies. Short sellers are.
In the absence of market manipulation – the spreading of false information, for instance – there is nothing sinister about short-selling per se.
Indeed, in the GameStop situation, there is a far greater likelihood that the market was manipulated via a “pump and dump” scheme or a concerted effort to drive the share price into the stratosphere within the chat rooms than some (clearly very unsuccessful) strategy by hedge funds to drive down the price.
The success of the chatroom flash mob strategy, and their losses, will disciple hedge funds as the new and emboldened “flash mobs” of retail investors search the market for new targets they can put the squeeze on.
This content was originally published here.