Short Seller Jim Chanos to Close Top Hedge Funds

Unlock Editor’s Digest for free

Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.

One of Wall Street’s best-known bears, Jim Chanos, announced to his backers that he was closing his top short-term hedge funds after more than three decades.

Chanos is best known for his bet against Enron, the energy trader that collapsed in 2001, as well as his more recent, but unsuccessful, campaign against electric car maker Tesla, which he called a “circus.” .

In a letter to investors seen by the Financial Times, Chanos wrote: “It is no secret that the long/short equity business model has come under pressure and interest in fundamental stock picks has waned . »

He added: “While I am still as passionate about research and investing, I feel compelled to pursue these passions in a different construct. »

Chanos, 66, said most of the funds would be returned to investors by the end of the year. He will continue to offer tailored advice on short-term fundamental ideas as well as macroeconomic insights.

His decision to close the funds was first reported by the Wall Street Journal.

“Even in the face of market euphoria for several years, we have worked hard to meet your expectations and ours,” Chanos said.

In his letter, he said his short positions had generated annualized alpha – outperformance relative to major market indexes such as the S&P 500 and Russell 2000 – of about 8% since the 2018 market low and more than 20% over the last three years. .

“These results, despite zero interest rate policy, meme stock mania and more, remain ahead of virtually every hedge fund industry performance index,” he added.

Short sellers aim to profit from falling prices, borrowing stocks on a bet that their value will have fallen by the time they return them. Although it is an established part of the financial markets, it has always generated controversy, often from the executives of the targeted companies.

Chanos’ relatively high public profile contrasts with the low-key approach taken by many short sellers, who rely heavily on social media – a tool Chanos did not have access to during his first two decades in the business. industry – to broadcast their warnings about investments perceived to be overvalued or fraudulent. .

Despite some major losing bets from the likes of Tesla and some big tech companies, Chanos has never lost his skeptical bent, telling the FT in 2020 that “we are in the golden age of fraud”. A week before, his funds completed a $100 million short on German payments company Wirecard, which filed for bankruptcy after admitting that most of its cash didn’t exist. Wirecard’s collapse follows a five-year investigation by the FT into its accounting.

Chanos created his first fund, Kynikos Associates, in 1985, using a Greek word associated with cynicism.

His most famous bet, Enron, came after it was troubled by revelations suggesting off-balance sheet financing. A surprise loss reported by the Wall Street darling in late 2001 sparked a regulatory investigation and, ultimately, its collapse amid fraud that resulted in several executives being jailed.

Before the 2008 financial crisis, Chanos also warned of the risks of a credit crunch.

Last year, he shorted data centers despite their popularity with investors, including large private equity groups, who were betting on an increase in demand for server space as online activity was skyrocketing.

Chanos told the FT it was selling older data centers because their biggest customers, Microsoft, Amazon and Google, were likely to build their own in the future, reducing demand for existing sites.