Revolt against short sellers seen as ‘nirvana for fraudsters’

Attacking short-sellers would end up benefiting fraudsters, says VGI Partners executive chairman Robert Luciano.

Robert Luciano, Executive chairman at VGI Partners. Hollie Adams/The Australian

The day trader revolt against short sellers is “nirvana for fraudsters”, says VGI Partners executive chairman Robert Luciano.

As hedge funds around the globe try to make sense of recent short-squeeze attacks fuelled by amateur investors and Reddit users, Mr Luciano, whose fund takes both long and short positions as part of its investment strategy, on Thursday revealed that VGI had been squeezed on some of its own shorts late last year, resulting in “substantial losses”.

These losses were offset by gains in its long holdings but the impact was enough for the investment team to overhaul its approach to short-selling.

“Coming out of the second half of last year we incurred some substantial losses on shorts … we had a couple of squeezes in the third quarter,” Mr Luciano said.

“(Those squeezes) taught us a very good lesson: how to evolve and basic things like if there’s a certain level of short interest we would just avoid it (now), regardless of how attractive it may be. Days to cover, we’re watching that.”

Retail interest in a stock is now another red flag, he said.

“We’ve been monitoring social media and watching these various trends, so we’ve avoided these kinds of situations,” Mr Luciano said. “We have some single stock shorts on right now in both of our portfolios and neither were affected by what took place (in the US) because we’ve adopted and evolved our processes to ensure that won’t happen.”

Amateur investors have wreaked havoc on Wall Street in recent weeks, punishing hedge funds by sending shares in heavily shorted stocks to eye-watering levels.

This army of traders sent GameStop shares rocketing from $US18 at the start of January to a high of $US483 last week. Its price has since tumbled to around $US90.

“We’ve been worried about single stock shorting for a while, for a variety of factors: easy money, zero rates, gamification of stock trading,” Mr Luciano said.

Attacking short-sellers would end up benefiting fraudsters, he warned.

“This is nirvana for fraudsters, what is currently taking place and being facilitated by central banks and governments.

His comments echo those of Bronte Capital founder John Hempton, who earlier this week said the attack on short sellers was the greatest gift to fraudsters he had seen in his lifetime.

Billionaire stockpicker Kerr Neilson, meanwhile, said the day trader revolt was a “spectacular occurrence” that would happen again.

“This is an environment where Bernie Madoff would not have been uncovered. This is an environment where a variety of situations would not be uncovered,” Mr Luciano said.

US fraudster Bernie Madoff orchestrated the largest Ponzi scheme in history, which was uncovered during the global financial crisis. He deceived investors for decades, swindling them out of billions of dollars.

With the risks of short-selling on the rise, Mr Luciano said VGI was focused on long-term structural shorts.