The Short Side of Activist Investing

A recent Bloomberg Gadfly piece observes that “investors who make bearish bets on stocks and then lay out their case publicly” have delivered a “performance as a whole [that] is not all that great in the short term – or in recent years either, at least as far as market-beating returns are concerned.” Along with a number of specific anecdotes, the article highlights data from Activist Shorts Research that shows a declining impact to the public announcements of activist bearish short investors and funds. “So far this year, stocks that have been targeted by shorts have fallen an average of 4.8 percent in the week after a bearish bet was revealed, compared with 12.9 percent in 2011.” Over the longer term, however, “stocks of companies targeted by activist short investors since the start of 2013 declined 19.6 percent on average over the life of an investment,” whereas, “during the same period, the S&P 500 outpaced those returns by roughly 26 percentage points.” While there are big success stories for such an approach, including Valent Pharmaceuticals and a number of rather striking international examples, “there’s wide scope for failure.” Failures may result from merger/acquisition of a targeted company, or just a failure of the idea to pan out. The article concludes by noting a big forthcoming bet by Kerrisdale Capital Management, who has a “fund being set up to short the equity of just one company” – apparently a technology company with a market cap of at least $10 billion.