The Short-Sellers Are Now Standing Tall

The stock market’s recent nose-dive might be jarring many investors, but it’s a long-awaited victory for a segment of Wall Street that was nearly given up for dead: Short-sellers.

“None of us are complaining,” said Benjamin Kopin, who runs Lynx Partners, a Chicago fund that has $13.5 million invested in selling stocks short.

Short-sellers try to profit from falling stock prices, a strategy that’s taken a drubbing over the past 5 1/2 years as the bull market kept climbing to historic heights.

“There are a lot of people that have simply left the business,” said Michael Long, whose Rockbridge Partners in Charlotte, N.C., tracks the short-sellers’ performance.

But for the “shorts” who remain, the market’s recent correction is a welcome relief, putting them back in the black for the year so far.

“We had been down like 13%” earlier in the year, “and we are now up by 10% to 11%,” said one East Coast short-seller who manages $35 million but declined to be identified.

“Thank goodness, the short profits kicked in with a vengeance,” he said.

In a typical short sale, the trader borrows stock from a broker and then immediately sells the shares on the market. If the stock then drops as hoped, the short-seller goes back into the market, buys the stock to return to the broker, and pockets the difference in price.

Some traders do nothing but short stocks. But short-selling is also one of many tools used by so-called hedge funds, which have exploded in popularity in recent years. The funds utilize all sorts of equity, fixed-income, futures and currency strategies.

Either way, short-selling has been a big gamble. As the stock market soared 34% in 1995--as measured by the Standard & Poor’s 500--short-sellers suffered average losses of nearly 29%, according to E. Lee Hennessee, a hedge-fund consultant at the investment firm Weiss, Peck & Greer in New York.

Those followed big losses in 1993 and 1991. Some of the best-known names in short-selling--such as the Feshbach brothers of Palo Alto, who once managed nearly $1 billion for short sales in the late 1980s--virtually abandoned the business.

James Chanos, thought to still be the biggest short-seller through his firm Kynikos Associates, reportedly has watched his assets shrivel to $120 million from $400 million a few years ago.

Chanos and the Feshbachs did not return calls seeking comment.

The losing pattern continued this year until June. But that month, the market began weakening enough to give short-sellers an average 8% gain, Hennessee said.

Although figures aren’t yet available, it’s likely the shorts also gained at least that much so far this month, Wall Streeters said.

Short-sellers particularly focus on stocks they believe are vastly overpriced relative to the business fundamentals of the underlying companies.

Many technology stocks fit just that description, and short-sellers have especially cheered the nose-dive in technology stocks lately.

“They’ve been blowing up one by one,” said Michael Murphy, whose Overpriced Stock Service newsletter is widely followed in the short-selling community.

Though none of the short-sellers interviewed would disclose specific stocks in their portfolios, there’s agreement that shorts earned handsome profits on such technology issues as disk-drive manufacturer Iomega, health-care products maker Epitope and computer-parts producer Micron Technology.

However, short-sellers are far too bruised to be giddy with their recent success, and they’re not predicting a short-sale revival, either.

“As for the glory days of the Feshbachs, you won’t see that again until we’re at the next bottom of the market,” Murphy said.