The latest assault on Wall Street short sellers has a long tradition, dating back to, well, at least Napoleon. “Treasonous,” he called them for betting against government securities.

They survived that and numerous other attacks over the next several centuries. But the GameStop uprising could mark the end of an era for the public short — the long-vilified folks who try to root out corporate wrongdoing, take positions betting a stock will fall and then wage public campaigns.

The biggest casualty came Friday, when Andrew Left’s Citron Research said it will discontinue offering short-selling analysis after 20 years of providing the service. Others are already adopting less-aggressive tactics or evolving into different forms and shapes altogether. Melvin Capital was forced to retreat by dumping its short position on GameStop, Carson Block and others have cut bets, and some of the mightiest hedge funds are nursing double-digit losses and exploring their next steps.

Few on Main Street or in corporate America, who see short sellers as detestable vultures with dubious practices, are shedding many tears, of course. Yet some investors, who say shorts serve to police the markets, might be. Time and again, short sellers, who practice the risky art of selling borrowed stocks to buy them back at lower prices, have been seen as a critical antidote to sniff out fraudulent companies, those with questionable accounting and business plans, or just to keep valuations under check. Enron is the most notable example.

“I’m still in business, so nowadays I think that’s well enough,” said Fahmi Quadir, a short seller best known for her successful bet against Valeant Pharmaceuticals and founder of New York hedge fund Safkhet Capital. The more fundamental problem, she said, is that fewer and fewer firms are spending substantial money to research companies or, in her case, “identify businesses that are predatory or fraudulent.”

Even before the attack from Reddit’s wallstreetbets forum, where a 6-million strong mob has joined forces to fire up stocks most hated by hedge fund elites, short selling was hard enough. A vast majority of shorts were already irrelevant, thanks to the popularity of index funds and the longest-running bull market in history.

Their numbers have been dwindling for some time. Of the thousands of hedge funds in the US$3.6 trillion industry, only about 120 specialize in mostly betting against stocks. And they have seen combined assets sliced by more than half to just US$9.6 billion over the past two years alone, according to data compiled by Eurekahedge.

“It is like watching the police doing a bank raid,” Crispin Odey, one of the world’s most bearish hedge fund managers, said of the trend. “There were already fewer short positions in the market before the Reddit mob began their attack than we have seen for 15 years.”

Some of the most-feared short sellers are ducking for cover. Block, whose forensic research notes have sparked precipitous declines in a number of companies, has “massively” cut his short bets. A US$1.5 billion London-based hedge fund with one of the best records of short selling declined to be even named in this story on fears of being hunted down by the retail investors. Another has assigned a staffer to scour the wallstreetbets page for signs of brewing revolts as it reassesses its bets.

Short seller Gabriel Grego, founder of Quintessential Capital Management, said he is pausing bearish wagers in the U.S. While he thinks “short-selling is alive and kicking,” he said it’s time for caution. The GameStop rebellion shows that retail investors are now conscious of their power and that won’t disappear, he added.

Hated But Necessary

Shorts have faced such sieges time and again in their more than four centuries of existence. The first such trade is said to have occurred in 1609, when Flemish merchant Isaac Le Maire attempted to short Dutch East India Company’s shares. A year later, the company convinced the Dutch government to outlaw short-selling, saying the likes of Le Maire were harming innocent stockholders, including “widows and orphans.”

Napoleon banned the practice 200 years later and during Wall Street’s crash of 1929, short-seller Ben Smith hired bodyguards because of threats from angry investors. When the financial crisis intensified in 2008, U.S. regulators restricted short selling of financial stocks. Many other countries followed. More recently, billionaire Elon Musk has taken to social media lambasting short sells, calling them a scam.

But in the more favorable view, shorts are seen as the ultimate cop on Wall Street, devoting countless hours of detective and forensic work, taking on mighty companies and regulators and exposing themselves to potentially unlimited losses. Supporters say that in a world where the traditional stock research industry has lacked the spine to put sell recommendations on struggling companies and as passive investing plays an even bigger role, the descendants of Le Maire are badly needed.

Take for example Enron’s accounting scandal. Jim Chanos, the founder of hedge fund Kynikos Associates, helped expose the fraud and rode its decline from an average US$79.14 per share in 2000 through December 2001, when it collapsed to 60 cents. And as recently as last year, German regulators praised short sellers after initially banning them for exposing Wirecard AG, which filed for insolvency proceedings after revealing that 1.9 billion euros (US$2.3 billion) of cash was missing.

New Rule Book

Other observers are less sympathetic. Before the financial crisis in 2008, U.S. regulators modified certain rules to make shorting easier, according to Brian Barish, chief investment officer of Cambiar Investors. Some hedge funds used that as a tool to brutalize companies that were viable but in need of capital. Insolvencies that were preventable followed and real people got hurt, Barish said.

“I don’t think hedge fund books need any help,” Barish said. “Let them taste their own medicine.”

For now, hedge funds that tactically put on leveraged bets against companies for short-term profits face the biggest risk to their survival. They are expected to be selective, avoid crowded trades, borrow less and stay away from companies with heavy retail investor participation. Most importantly, they may retreat if required.

Peter Borish, chief strategist at Quad Group, predicts lower returns for such funds as they shy away from outright shorting of lower-priced stocks and take profits more quickly. “If you’re looking for a short-seller to hit home runs, you’re more likely to get singles and doubles,” he said of the new outlook.

Other funds may opt for using discrete over-the-counter put options to place short bets, since they don’t need to be disclosed in regulatory filings. Melvin Capital’s shorts being listed in their public filings helped make them a Reddit bro target.

Many still believe that ethical short-selling, or going after criminal companies, will survive. Retail investors may even be less motivated to revolt against a well-intentioned short that exposes a fraudulent company. They are less certain, however, about the resilience of passive short-selling, where traders bet against a stock not for criminal reasons but based on the fundamentals of a company. Melvin’s wager on GameStop, for example.

Some bears are taking the uproar mostly in stride. Jim Carruthers, who once ran Third Point’s short book and now heads Sophos Capital Management, is reported to be winding down some positions, but he’s not all that bothered.

“We believe this speculative fervor that has turned the stock market into a casino of late will eventually hit a wall, as all bubbles do, and will provide as target-rich an opportunity set we have seen in our careers,” he said.

For now, GameStop’s saga represents an unprecedented shift in power where a cocktail of cheap money, easy commission-free trading, a bored and quarantined society and a stick-it-to-The Man sentiment among masses of retail investors prompted them to hunt down the hunters.

As Citron’s Left put it in a YouTube video announcing his departure from the short world: “Twenty years ago I started Citron with the intention of protecting the individual against Wall Street — against the frauds and the stock promotions. Since then, he added, Citron lost its focus: “We’ve actually become the establishment.”

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