(Bloomberg) -- Carson Block is certain that markets need short sellers “more than ever.” The problem: a relentless stock rally and fresh regulatory challenges are weighing on his bearish peers struggling to raise capital.
For more than a decade investors have “stopped being remunerated for caring about risks,” fueling a speculative fever across markets, the Muddy Waters founder said Friday in an interview with Bloomberg Television. On top of the US stock market’s bull run and threats from regulators, Block lamented the US Securities and Exchange Commission is making it harder for whistleblowers to get paid.
“It’s easy to demonize short sellers as part of a populist message and somehow call us the suits,” he said. “The market needs short sellers more than ever given the amount of games that are being played, but if the long-side doesn’t care, this can continue — until it doesn’t.”
More broadly, the universe of short selling has been shrinking with a short-bias hedge fund index from HFR whittled down to just 14 constituents from 54 members in 2008. Activist campaigns like those pursued by Block launched at the slowest pace in a decade in 2022, with only a tiny uptick last year, according to Diligent Market Intelligence.
“It’s never been a good time be a short seller,” Block said. Traditional short selling is “a very difficult business right now because there’s this inclination to buy narratives and allocators don’t want to lose money.”
Jim Chanos renowned for calling Enron Corp.’s demise, expressed similar sentiment recently. He said the lack of interest among institutional investors to put cash into a bearish strategy is one of the reason short sellers like himself have been struggling. Late last year, Chanos announced he was converting his hedge fund into a family office after almost four decades.
Real Estate Woes
Meanwhile, Block doubled down on his bearish call on commercial real estate CLOs and even sees “interesting” opportunities for shorts among regional banks but pointed to all the threats short sellers face.
The Muddy Waters executive also affirmed his bearish bet on Blackstone Mortgage Trust Inc., citing troubles with multifamily properties. He expects a dividend cut in the second half of the year. In December, Block revealed that he took a short position in the Blackstone trust, which makes loans collateralized by commercial real estate, saying that it faced a potential liquidity crisis.
The trust didn’t respond to a Bloomberg request for comment. Shares of Blackstone Mortgage Trust rose after Block’s comments and are up 0.2% as of 12:25 p.m. in New York. The stock is still set for a nearly 10% decline this year.
Carson Block has been gathering money for a fund that will bet on rising metals and mining stocks. The Muddy Waters Resources Fund filed a private placement notice in June with the SEC, indicating the vehicle initially brought in about $1.5 million. Earlier, this year his firm launched their first long-only fund focused on Vietnam, the rationale behind which includes a view that China is “uninvestable,” founder Block told Bloomberg Television in March. He sees Vietnam as a potential beneficiary of redirected capital flows.
--With assistance from Katie Greifeld and Matthew Miller.
(Updates with additional comments and context starting in fourth paragraph.)
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