Nathan Anderson, founder of short-seller Hindenburg Research, and Gautam Adani, chairman of Adani Group.
Nathan Anderson, founder of short-seller Hindenburg Research, and Gautam Adani, chairman of Adani Group. Image Credit: Washington Post | Bloomberg


  • How the contrarian investment strategy and a stinging research report hit India's Adani Group.
  • In recent days, an attack pulled off by short-seller Hindenburg Research against India’s Adani Group, has seen the latter’s shares tank.
  • A short position, based on the thesis that a stock price will drop, can yield tonnes of money; it's also fraught with huge risks.

Outside the stock trading community, the word “shorting” has increasingly earned the mark of an etched-in-your-brain kind of buzzword.

For a number of retail and institutional stock buyers, it also leaves a bitter after-taste of getting burnt looking at how share prices of erstwhile investors’ darling stocks plunge.

In recent days, an attack pulled off by Hindenburg, a known short-seller, against India’s Adani Group, has seen the latter’s shares tank.

Hindenburg, the research outfit seen as the main culprit for the rout, is vaguely referred to as a villainous short-selling predator. As the cloud amid finger-pointing clears, it's emerging that numerous market participants could be in for a shakedown.

It turns out that there’s money — lots of it — to be made from this stock trading strategy, for those on the shorter’s side.

Short sellers have pocketed an estimated $15 billion by betting against Tesla in 2022, according to one report.

How does shorting work? Is it legal? Who are the biggest shorters? How much has been made — or lost?

What’s stock “shorting”?

Shorting, or short-selling, is the act of selling a security at a given price without possessing it and purchasing it later at a lower price. It is a legal, accepted way to invest and make money in stocks, though subject to stringent regulations.

Being "short" in an asset means investing in such a way that the investor will profit — if the asset's value declines.

Shorting is the inverse of a more traditional "long" position, in which the investor profits if the asset's value rises. A short position can be obtained in a variety of ways.

Stock shorting
Image Credit: Vijith Pulikkal | Gulf News

Why is it called “shorting”?

In capital markets, shorting (also “short selling”) is known as a short position — in which an investor essentially plays against the market, gaining when prices fall.

Stock investing is all about the clash of theses, based on fundamental or technical research or a combination of the two.

Research can go deep and wide. To short-sell is to take the thesis that a stock will fall, based on some fundamental factors borne out by market research.

What does it have to do with stocks rout of Adani-linked companies?

Hindenburg Research LLC, a New York-based investment research firm, has released a stinging report on the Adani Group on January 24, 2023.

The report, published on its web site, has a long laundry list of allegations, including a number of downright damning ones.

To wit:

  • That the Adani Group, “is pulling the largest con in corporate history”;
  • It cited that while Gautam Adani has claimed in an interview to “have a very open mind towards criticism…Every criticism gives me an opportunity to improve myself…” Adani has, in reality, shown otherwise. “(Adani) repeatedly sought to have critical journalists or commentators jailed or silenced through litigation, using his immense power to pressure the government and regulators to pursue those who question him,” Hindenberg reported.
  • “We believe the Adani Group has been able to operate a large, flagrant fraud in broad daylight in large part because investors, journalists, citizens and even politicians have been afraid to speak out for fear of reprisal.”
  • “We have included 88 questions in the conclusion of our report. If Gautam Adani truly embraces transparency, as he claims, they should be easy questions to answer.”
  • The report raised worries about the Adani group's debt levels.
  • It also cited Adani’s usage of tax havens.

One fallout from the report: Most Adani Group shares fell substantially on Monday (January 30), as the Indian conglomerate's rebuttal of Hindenberg’s criticism failed to pacify investors.

Who is Nathan Anderson?
Nathan Anderson is the founder of Hindenburg and is known as an activist short-selling platform. He takes Harry Markopolos as his role model. Markopolos is a market research guru who first flagged Bernie Madoff’s fraud scheme, worth a reported $64.8 billion.

Hindenburg is best known for its September 2020 bet against Nikola Corp, which resulted in "a big win” for the company, Anderson he told the Wall Street Journal, though he declined to say how much.

Anderson claimed Nikola misled investors about its technological achievements. Anderson took issue with a video Nikola created showing its electric truck driving at high speeds — when, in fact, the vehicle was really thrown down a hill.

Though a known shorter, Hinderburg also takes long positions, as when Twitter shares sunk to $36.75 on July 13, before Elon Musk finally agreed by October 4 to go ahead with the deal to take it private at the original offer of $52.40, at which point Hindenburg announced they had sold the stock.

The market crash has resulted in losses of $65 billion in the group's stock prices, according to a Reuters report on Tuesday.

How does Hindenburg short Adani Group?

Hindenburg continues to short Adani Group through its US-traded bonds and non-Indian-traded derivative instruments.

At the start of the year, Gautam Adani's estimated net worth surpassed that of billionaires Jeff Bezos, Bill Gates, and Warren Buffett. Following Hindenburg's explosive report, his wealth has reportedly dropped by at least $34 billion in just three trading days.

Amid the stocks rout of Adani-linked companies, the group said they are now evaluating legal action against Hindenburg.

Jatin Jalundhwala, Adani's top legal officer, had lambasted Hindenburg’s “maliciously mischievous, unresearched report", which he said had "adversely affected" the company's shareholders and caused "unwanted agony for Indian residents."

“We are deeply disturbed by this intentional and reckless attempt by a foreign entity to mislead the investor community and the general public,” Jalundhwala said in a statement. “We are evaluating the relevant provisions under US and Indian laws for remedial and punitive action against Hindenburg Research,” Jalundhwala added.

Short-selling is a 400-year-old-plus practice. Dutch businessman Isaac Le Maire, a shareholder of the Dutch East India Co. (Vereenigde Oostindische Compagnie or VOC in Dutch), is credited for "inventing" the practice of short selling in 1609.

In the US, the practice of short selling was one of the central issues studied by Congress before enacting the Securities and Exchange Act in 1934. While Congress made no judgments about its permissibility, it gave the US Securities and Exchange Commission (SEC) broad authority to regulate short sales to prevent abusive practices.

Is short-selling regulated?

Yes. Short selling is a regulated and widely used strategy. Investors use short selling when they believe — based on fundamental research — that a stock price is overvalued.

What are the benefits of short-selling?

In general, short selling promotes liquidity, stabilises the market, and helps investors and companies reduce risk in their portfolios.

What are the risks of short-selling?

Short sellers face unique risks, such as:

  • The risk that stock loans become expensive.
  • The risk that stock loans are recalled.
  • The risk of loses, i.e. when the stock a short-seller is betting against actually skyrockets in price.
  • Short selling risk also affects prices among the cross-section of stocks.
  • In general, stocks with more short selling risk have lower returns, less price efficiency.

Is Hindenburg Research reliable?

Hindenberg was founded in 2017. It states on its website that that the company specialises in “forensic financial research”.

In 2021, the privately-owned Hindenberg had a total of 5 employees. It generates public reports via its website that allege corporate fraud and malfeasance. It was named after the 1937 Hindenburg disaster, which they characterise as a human-made avoidable disaster.

In its report on Adani Group, Hindenburg stated that it was presenting evidence that the Group has engaged in a “brazen stock manipulation and accounting fraud scheme over the course of decades.”

Adani Group accused Hindenburg of self-interest in publishing the report, and making money on its short-sell positions.

$ 16 b

estimated earnings of Tesla short-sellers in 2022.

Who are the best examples of shorters? How much money did they make?

Tesla and Amazon are two of the most popular targets of short-sellers. In 2020, short-sellers reportedly lost $5.8 billion in their positions against Amazon, according to market researcher S3.

Michael Burry, known Tesla shorter, believes the EV manufacturer receives "huge government and electricity subsidies." Another is Neil Campling, Mirabaud's director of technology research, who has an "extremely poor" opinion of the premise that Tesla's stock price would increase, opposite the view of Cathie Wood (of Ark Innovation), a well-known long-term Tesla investor.

UK hedge fund manager Crispin Odey reiterated his wager against Tesla, too, claiming its shares are already "outrageously inflated". Tesla shorts reportedly earned about $15-$16 billion as the company’s dropped in 2022. But that was after the shorts reportedly lost $40 billion in 2020 as its stock price went through the roof.

Every investment decision comes with downward — and upward — potential. In most jurisdictions, regulators mandate a warning to investors, which goes something like this: “Past performance is not indicative of future results”.

While everyone knows this at the back of their mind, the risk warning shows no one can fathom the market more than the market itself.