‘INSANE ALPHA’ FADES FOR SHORT SELLER,

Carson Block is having an unusually tough time betting against Chinese stocks.

The famed short seller’s recent calls to unload shares of GSX Techedu Inc., TAL Education Group and Joyy Inc. have largely backfired after the stocks rallied following brief dips when his reports were first posted.

“GSX, after we reported it, tripled,” Block said. “There is clearly something wrong.”

Block, founder of Muddy Waters Research, isn’t questioning his methods. He blames options traders, small floats and investors taking advantage of low volumes to push the Chinese stocks back up after his calls.

The result has been a grim year of shorting China equities for Block, who earned his reputation following successful bets against companies like Noble Group Ltd., the commodities firm in Singapore, and Sino-forest Corp., a Canada-based timber company that operated in China.

GSX, the online education firm that Muddy Waters called out in May, soared more than 200 per cent through August before paring some of its gains. TAL Education has almost doubled since Block announced his short position more than two years ago.

GSX has said Muddy Waters doesn’t understand its business model. TAL Education called the report erroneous and deceptive.

The trend is playing out again with Joyy, the streaming service that plunged 26 per cent on Nov. 18 when Muddy Waters announced its short call. The stock is crawling back, down just 12 per cent since before the call.

“Given the infamy of short sellers and unchanging methods, a short sell report essentially puts a bull’s-eye on their back asking for a short squeeze,” Justin Tang, head of Asian research at United First Partners, said. He also noted the impact of the recent market rally. “Short sellers are swimming against the current at the moment, given the overhang lifting from the U.S. elections and the coronavirus vaccine.”

Block said Joyy is a “fraud” that’s a zero since 90 per cent of the “gifters” allegedly paying for entertainment on Joyy’s servers are robots. “The reality is that the vast ... majority of the gifters are fake and the money is round tripped and recycled,” Block said in the interview with Erik Schatzker.

Joyy has said Block doesn’t understand the way streaming services work in China. “Muddy Waters’s report is full of ignorance about the livestreaming industry and the livestreaming ecosystem,” Joyy said in a statement. “The report contains a large number of errors with unclear logic, confusing data, and hasty generalizations.”

Block says about 65 per cent of the names he has shorted over the past decade have declined in the long term, generating added value, or alpha, for his clients. One of his notable winners this year was in China — Luckin Coffee Inc. is down almost 90 per cent since his January bet.

“What we short generates pretty insane alpha,” he said, without elaborating on his returns. “This year, all bets are off.”