Dealbook has reprinted a great profile of soon-to-retire, short-biased hedge fund guy David Rocker. More than anything else, it reinforces how desperately difficult the short-selling business is:
Pain is the word that comes up again and again when people talk about shorting. And Rocker’s tolerance for pain is higher than many other short sellers, says one longtime Rocker investor, adding that the firm is more aggressive than most short sellers. “They are very good at understanding when businesses are likely to go into more structural declines and identifying and understanding aggressive accounting, including potential frauds. And they are extremely passionate in their quest for the truth.”
Still, all short sellers face numerous impediments. First, of course, is the uptick rule: shorts can be put on only at a price above the prior trading price. Second, shorting can get awfully expensive: “When a stock gets hot and the supply dwindles, the brokers lending the stock are forced to recall it,” says one prime broker. If a short seller can’t find more stock to borrow and replace the short, he closes the position. “And then there’s the other side, short squeezes, when the stock reaches a certain short interest and people are starting to buy it back. It makes it difficult to stay in.” During a short squeeze, investors who sold short buy stock to cover their positions in order to cut their losses.
… Is it any surprise that while there were maybe 50 firms specializing in short selling a decade ago, the number has dwindled to about a dozen today? Of the 208 hedge funds in Absolute Return’s Billion Dollar Club as of January 1, 2006, only two are short-biased funds, Rocker and Kynikos. It’s clearly an endangered species; even Kynikos’ Chanos says that “whether there’s a future for dedicated short-selling funds remains to be seen.”