Q&A: Short Seller Sahm Adrangi

When Sahm Adrangi launched his Kerrisdale Capital Management hedge fund in 2009, a historic bull market was just getting underway. Defying its rise, Adrangi became one of a handful of young men—he’s now only 36—who made his name as a short seller betting against stocks. Last year, even as the broader market rose an eye-popping 22 percent, Kerrisdale managed a 20 percent gain.

Now things are looking even better. After February’s market swoon, Adrangi tells Worth, short sellers are in the catbird seat.

A Tehran, Iran, native who grew up in Vancouver, Canada, and graduated from Yale, Adrangi first made his mark in 2011 successfully shorting U.S.-listed Chinese companies that he believed were frauds. Since then, Adrangi has gained a reputation for broad short-selling skills, taking on satellite companies like Globalstar and Dish Network. Although his fund also goes long, which helped during the bull market, his latest short bet, unveiled in February, is on Eastman Kodak. Kodak’s beaten-down stock had jumped on news that the company is planning to offer a blockchain-based service to protect photographers from copyright infringement, but the stock is off 55 percent from its early February highs, now trading around $5.05.

Adrangi recently talked to Worth about the current state of short selling.

Q: You’ve been a short seller throughout the entire roaring bull market. Has that been challenging?

A: When the market is doing well, as it has been for the past seven or eight years, it’s more important than ever that you get your ideas right because the potential for losing money is a lot more than if the market is flat. When you get something wrong on the long side, maybe the stock goes down 25 percent, 30 percent, and that’s a disaster. A disaster on the short side is like losing 200 percent. And it really does happen. We’ve lost north of 200 percent on a single name.

Ouch! On the other hand, does an ebullient market like we’ve had create more opportunities for short sellers?

It’s been a pretty healthy market for short activism because when the market’s frothy, there are stocks that really get out of hand in terms of valuation, and that’s good for us.

Can you define what you mean by short activism? And is it the best way for shorts to make money these days?

Activist shorts are those who short a stock and then go out and publicly debate its merits, present their investing thesis. We leverage the credibility that we’ve built over the years to get the market to start looking at our short thesis and discussing it. You can make money through passive shorting—not talking about your research and views publicly—but it is hard.

The current market unease notwithstanding, these have been tough times for short sellers. As of 2018, Hedge Fund Research no longer has a short-biased index, saying there are not enough short sellers to warrant a separate index. Last year that index fell 10 percent. Do you think this phenomenon will change if the overall market continues to go down? With the recent declines, are short sellers going to come back?

Last year, a lot of shorts got burned. But when the market goes down like it did in February, investors begin to be on the lookout for more short sellers. Now the appetite for short-seller hedge funds is strong. If investors want long exposure, they can often get it through other cheaper products, like ETFs or mutual funds. But that’s not the case with shorts—exposure to short-oriented alpha can typically only be accessed through hedge funds.

Short sellers often are viewed as cynics. Is that how you would describe yourself?

I am not a big overall market bear. When discount rates are at 1 percent, good businesses are worth a lot. And we’re not the experts on overall global macro economic policy. But we can make money picking off individual companies that have businesses that don’t work.

Regarding your latest short position on Kodak, you recently said that you haven’t seen a trend this big since the Chinese frauds. Could you elaborate on that?

Figuring what’s happening with crypto assets and crypto currencies is interesting. There could be winners in that space, but there certainly will also be losers. Kodak’s ideas around a blockchain technology to stop copyright infringement for photographers and videographers just doesn’t make any sense. It doesn’t add anything to what’s already out there.

A lot of companies have added crypto aspects to their overall business, like Long Island Tea becoming Long Island Blockchain. What do you make of that trend?

Not much. To the extent there are winners, I wouldn’t be surprised if they are all private companies with coins that they’ve issued that are not publicly traded on the stock market but are traded on crypto exchanges.

If the market decline continues, how will that affect perceptions of short sellers? Do you think that people will say, “Oh, short sellers were right” about this or that?  On the other hand, will investors be more antagonistic towards short sellers when they see the value of their stock portfolios decline?

Sometimes people blame short sellers, but I think it’s harder to blame short sellers if there’s simply a correction, like we had in February, compared with 2008, when the market was falling apart. I don’t know that people really have the same sort of conspiracy theories against short sellers that they may have had in the past.

Have you increased your shorts in this market?

We’re out there. We’ve been shorting this month.

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