After suffering from multiple attacks, US stock shorts are retreating, thanks to the stock market's gravitational bull market, lingering regulatory threats, and indiscriminate cramming of intraday traders, etc.$GameStop (GME.US)$And other stocks continue to rise.

It may be a bad time for Wall Street now. Famous shorts have been under attack one after another. Jim Chanos withdrew from the business after financing failed. Carson Block's Muddy Waters Capital launched the first one-way long fund. The founder of Citron Research, Andrew Left, called his peers "an endangered species".

According to Goldman Sachs' data, typical stock shorts in the S&P 500 index are at their lowest level in over 20 years. HFR data shows that while the overall size of equity hedge funds has grown nearly three times, the assets of short hedge funds have shrunk from $7.8 billion in 2008 to $4.6 billion. The radical strategy advocated by famous shorts such as Block and Left, which seeks out company flaws and bets on them before public discovery, was launched at the slowest pace in a decade in 2022 and only made a slight increase last year.

Against this backdrop, a number of famous shorts have reduced their short activities, and some have already left the industry, including the most famous investors. Jim Chanos, the legendary short-seller famous for predicting the collapse of Enron Corp., said, "Our fund business is shrinking, people just don't want to invest. Investors (mostly institutions) have given up the fact that short selling has excess returns."

Chanos announced at the end of last year that he would turn his hedge fund into a family office, nearly 40 years later. He said that investors lack interest in bearish strategies and that the fund "cannot pay management fees." Assets have dropped from over $6 billion in 2008 to less than $200 million.

For this corner of the investment world full of controversies, some praise it for exposing the corporate scandals of companies like Wirecard, while others criticize it for harming investor interests and exacerbating market volatility. HFR's bearish hedge fund index had 54 component stocks in 2008, but after years of losses and multiple strategies facing capital outflows, the index's component stocks have dwindled to 14.

The goal of shorts is to buy back (then sell) borrowed stocks at lower prices, return them to lenders, and keep the profits. But in a market where stocks only seem to rise, this can be difficult to achieve. Over the past decade, the market value of the S&P 500 index has skyrocketed by about $30 trillion, more than doubled in size, thanks first to the push of the era of ultra-low borrowing costs, and more recently to the frenzy of artificial intelligence.

JPMorgan strategist Nikolaos Panigirtzoglou believes that the stock market's "massive expansion" makes short positions unsustainable. This doesn't necessarily mean that short selling is wrong, but the market's upward trend means that any bearish argument requires more time to materialize, and in the meantime, shorts must pay borrowing costs for the stocks they sell. It's also no wonder that, according to Goldman Sachs' estimates, the median bearishness of S&P 500 index companies is currently around 1.7%, only slightly higher than the low point in 2001, and lower than the long-term average levels of all major stock industries.

But the market's rise is just one of a series of challenges. In 2021, the US Department of Justice and Securities and Exchange Commission (SEC) found that many aggressive short sellers were under investigation for market manipulation. No charges have been filed yet, but the SEC has also finalized rules requiring hedge funds and other large investors to report total short positions of certain stocks monthly, strengthening scrutiny of the business.

This is part of a global tightening trend, with short selling also being restricted in countries such as China and South Korea. This also expresses people's general suspicion of traders trying to profit from falling, which has long brought them wrath from the companies they target, investors in those stocks and the financial industry. The former president of the New York Stock Exchange even described them as "disgusting" and "un-American."

Andrew Left, founder of Citron Research, who was caught up in the Department of Justice investigation, said, "It's a bad business. You just put yourself in the middle of company and government lawsuits that will continue to be filed. Why should I do that?"

Left does not think he did anything wrong, but there have been no results from the investigation so far. At the same time, he is also one of the short sellers who suffered painful losses during the 2021 pandemic-induced battle for empty space. At that time, retail traders gathered on online forums to squeeze put companies by bidding up stocks of companies such as GameStop. Despite suffering heavy losses, short sellers were portrayed as villains in this saga, a role they had become accustomed to playing. Nevertheless, this event brought renewed negative attention to the industry.$AMC Entertainment (AMC.US)$Although they suffered heavy losses, the bears became the bad guys in this storm. However, it has to be said that this event brought about a new round of negative attention to the industry. Gabe Plotkin's Melvin Capital Management, which short sold GameStop, was the most famous.

All of this helps to curb aggressive short sellers such as himself. According to data from Diligent Market Intelligence, there were only 110 activities in 2023, compared to 280 in 2015.

Chanos scoffed at the entire incident, saying, "Retail investors buy these worthless stocks and then blame short sellers. This is definitely crazy behavior. Short sellers were the ones who were crushed by the GameStop phenomenon."

In the past two months, retail traders have once again shown their prowess, with the stock prices of several popular stocks, including GameStop, surging again. Contrarian investors may have avoided the worst, as data from analysis company S3 Partners shows that short selling interest in this video game retailer never bounced back after the 2021 incident, but this also serves as a reminder of the risks. In less than a month, a basket of stocks that Goldman Sachs hedge funds were shorting the most went from losing almost 10% from the beginning of the year to up over 13%.

”Meme stocks" dramatically demonstrate the "gamification" of the market. This "gamification" has destroyed the entire short selling industry. He said that in some recent tumultuous situations, he has once again bet on GameStop, but only with a small position and for "fun". "You can't short sellers on a large scale," Left said. "People are now aware that stock prices may rise for many different reasons after the GameStop incident."

"You can't go short sellers on a large scale," Left said. "People are now aware that stock prices may rise for many different reasons after the GameStop incident."

All of this helps to curb aggressive short sellers such as himself. According to data from Diligent Market Intelligence, there were only 110 activities in 2023, compared to 280 in 2015.

The downside potential for short sellers is theoretically unlimited. Industry insiders say that it is becoming increasingly difficult to attract new cash with high-risk put options, whether it's an aggressive company or a simple bearish fund. Russell Clark closed his fund, the RC Global Fund, at the end of 2021 after more than a decade of investing in the stock market. His betting on Chinese and American technology companies has reduced its assets from approximately $1.7 billion six years ago to $200 million. Asian holdings paid off, but his opposition to US large cap stocks inflicted heavy damage on his performance.

"If major allocators can make money by going long the S&P 500, why risk their careers on hedge funds with short bias? Seeing changes in the dynamics of the leading stocks is really needed before the need for short sellers can be seen," Clark said.

Chanos said the current downturn is part of a cycle, similar to what happened during the Internet bubble. The problem is that this downturn could last a long time, and he believes it has already lasted 15 years. During this period, Goldman Sachs' basket of short stocks posted an average annual gain of more than 9%, while the HFR short bias index posted an average loss of more than 10% per year.

According to Chanos, the longer the cycle, the more short sellers seem to be questioned and avoided. However, this is usually in the early stages of achieving huge profits.

This view holds that a continuing rising market not only creates overvalued companies that short sellers will eventually feast on, but also conceals poorly run and sometimes fraudulent companies. The situation may be especially true when short sellers are in the doldrums because short selling has been shown to curb bad behavior by companies and keep prices in check for companies with questionable financial statements.

Chanos believes that the abandonment of short selling by large investors is a "prime opportunity." Clark hinted that he might consider a return to his old line of business if he judged the conditions to be right. Even Left, who suffered losses at least twice over the past seven months, has released two reports, but he said he intends to publish reports only rarely and only for what he considers non-consumer-driven companies.

Meanwhile, despite suffering heavy losses in the initial GameStop incident, Glen Kacher's Light Street Capital Management has remained in this business. He has been using more customized baskets to make more widespread put bets, and this year his short stocks have helped boost the hedge fund's returns along with long positions, including those in tech giants such as Nvidia (NVDA.US).

Kacher said, "A large part of the market is composed of passive funds that do not analyze what is happening now, which creates opportunities for short sellers."

S3 stated that this year there are signs that bearish sentiment is rising from its historical lows, with the United States adding $76 billion, half of which are new short positions. According to Breakout Point statistics, as of April 2024, there have been 47 new put trades, and if this pace continues, it is expected to add 150 new put trades by the end of the year, an increase of 15% compared to 2023. Ivan Cosovic, the founder of the company, believes that SPACs and ESG-focused investments provide 'rare opportunities' for aggressive short-sellers.

However, despite central banks around the world raising interest rates to levels not seen in decades, the stock market continues to rise, making bearish bets difficult to sustain. Goldman Sachs says that most hedge fund short positions are currently focused on ETFs and futures targeting indexes, rather than individual stocks. These are more like hedging tools than inefficient bets on market direction or stocks.

At the same time, according to data from Acadian Asset Management, borrowing stocks in some corners of the market has become very expensive, which is another disadvantage for short sellers.

Some put investors are looking for other ways to express their views. Muddy Waters Capital LLC founder Carson Block said he sees Vietnam as a potential beneficiary of capital flows. The reason behind the company's newly established long-term fund targeting Vietnamese stocks is that some areas are 'un-investable'.

For Safkhet Capital founder Fahmi Quadir, the key to short-selling survival and even development is to find a strategy that can generate profits even in adverse environments. She has achieved some significant victories, including betting against pharmaceutical giant Valeant Pharmaceuticals when it was near its peak in 2015, and betting against Wirecard before it collapsed in 2020.

Quadir said, 'You have to be able to adapt to the market environment, or at least try to eliminate the market environment's impact on your portfolio. There is never a good time to put.'

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