Wall Street’s short-sellers are worried about their fate

Fahmi Quadir fears for her safety, so whenever she travels, she shares her GPS coordinates with her lawyer and a colleague. Nate Koppikar was once tailed by a private investigator into the bathroom in his own office. And Gabe Plotkin recently hired security after threats to his family.

Digging up dirt on big companies doesn’t make you popular.

Quadir, Koppikar and Plotkin are short-sellers — investors who profit off the failures of companies by betting that their share prices will fall. For this, they are reviled by executives and shareholders alike. Short-selling itself is banned in some countries. Dealing with such hatred, Quadir said, is “a cost of doing business.”

It’s always been a tough job, and especially so in the past year as stocks marched higher. The recent frenzy over GameStop made it worse. Everyday investors, many of them seething against what they see as a rigged system created to enrich Wall Street, bid up GameStop’s stock in part to attack short-sellers, dealing them a fresh reputational blow.

Some are rethinking their strategies. They are wondering whether the practice, portrayed in the 2015 movie “The Big Short,” still has a profitable future.

Short-sellers, including hedge funds such as Plotkin’s Melvin Capital, had wagered that GameStop shares would fall while its mall-heavy business shrank further. Instead, the shares skyrocketed when a group of mostly amateur investors, coordinating via social media and determined to outsmart big Wall Street funds, went on a buying binge.

Traditional short-sellers see themselves as financial detectives, sniffing out corporate wrongdoing or inflated stock prices, while aiming to make a profit. Their strategy: borrow shares of the target company from a brokerage firm and immediately sell them, expecting that they will eventually fall — sometimes on account of their research, which they often share widely.

If the price falls, the short- seller buys the now-cheaper shares back, returns them to the broker and pockets the difference. But the strategy can be risky. If shares climb — either because other investors make the opposite bet, as in GameStop’s case, or simply because the short-seller got it wrong — short-sellers lose.

In the past year, as the stock market soared more than 16%, hedge funds that were mainly shorting stocks lost nearly 47%, according to a Hedge Fund Research index that tracks industry performance.

“Short-sellers have been beaten up and left for dead on the side of the road in this bull market,” said James Chanos, founder of the short-selling hedge fund Kynikos Associates, who is best known for predicting accounting fraud at Enron before it collapsed in 2001.

The depiction of short-sellers as evil by hobbyist stock traders has troubled professionals such as Koppikar, a portfolio manager at Orso Partners, a San Francisco fund. “I could probably have more economic success doing something else, but I think that what we do serves a social purpose,” he said.

Short-sellers have weeded out corporate wrongdoing.

Two decades ago, Chanos began poring through regulatory filings and interviewing energy-market participants about the Houston energy trader Enron, which he suspected was using accounting gimmicks to lift revenues and hide losses. His hunch, and accompanying short position, proved prescient. Within a year, Enron filed for bankruptcy.

JOHN MINCHILLO/AP Short-sellers, including hedge funds, had wagered recently that shares in GameStop would fall while its mall-heavy business continued to shrink.