Renowned shortseller Jim Chanos’ funds made almost $100 million by shorting German payments company Wirecard ahead of its collapse. The company filed for bankruptcy after a five-year Financial Times investigation into its accounting practices.
A giant in the global hedge fund industry, Chanos is president and founder of New York-based Kynikos Associates, named after the ancient Greek word for “cynic”. His pitch is that he can identify corporate disasters-in-the-making, Harriet Agnew wrote for Financial Times. His 20 employees manage $1.5 billion in assets. Chanos also teaches a course on the history of financial fraud dating back to the 17th century (“how to detect it, not how to commit it”) at his alma mater, Yale University. And this right now is “the golden age of fraud”, Chanos told FT.
But Chanos predicts that “trouble is coming,” possibly in the form of regulations and higher taxes. In the current environment, Chanos said corporate wrongdoers can get away with fraud for a long time, exacerbated by lax oversight.
Short sellers such as Chanos look for overvalued companies. They borrow shares and then sell them, hoping to buy them back later for less. Short sellers “are profiting when others are losing money”, Chanos told Agnew, and this makes some people uncomfortable.
Chanos is on the finance committee of U.S. presidential hopeful Joe Biden, who supports a new California law to strengthen legal protections for workers in the gig economy, such as Uber drivers. Biden has said he will raise corporate tax rates to 28 percent.
“Political risk is one of the reasons that Chanos is shorting gig economy companies such as ride-hailing apps Uber and Lyft and online food-delivery platforms Grubhub and Just Eat Takeaway,” Financial Times reported. “Not only are they losing money, but he believes that there is going to be a greater political focus on low-wage workers, which poses an existential threat to their business models.”
Chanos says his mission is to understand a company’s business model and then determine if its financial statements reflect it. “Certain themes crop up time and again in his hunt for short positions: technological obsolescence, consumer fads, single-product companies, growth via acquisitions and accounting games,” Agnew reported. “Notably he looks for ‘legal fraud’ — where companies adhere to the accounting rules and regulations but there’s still an ‘intent to deceive.'”
Chanos predicted the 2007 downfall of U.S. energy giant Enron almost seven years before it happened, and made a fortune from its demise.
Enron epitomized “intent to deceive,” Chanos said. He saw that the company was using “aggressive accounting to front-load profits and hide debt in its subsidiaries,” Agnew reported.
Other famous financial frauds that Chanos helped expose include Baldwin-United and Drexel Burnham.
Chanos also bet for the past five years against Tesla, which recently bypassed Toyota as the most valuable carmaker in the world. Chanos still maintains he’s got a winner on his hands, Marketwatch reported.
Tesla “burnishes its results through aggressive accounting,” Chanos said. He described it as having “a culture of deception” because it is selling self-driving to consumers, which as yet “doesn’t exist”.
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Kynikos Capital Partners has delivered an average 22-percent gain per year for the past 35 years, doubling the return on the S&P 500, , according to FT.
Investment guru Ed Yardeni, president of Yardeni Research, said the seemingly endless surging stock market is due for a pullback. Investors might be “delusional” to think the party will last forever, he told CNBC.
For those who may see glamour in a career in short selling, Chanos has these words:
“Short-sellers put up with weeks and months of misery, and you feel good for hours and days.”