Notorious Short Seller Raises $100 Million To Take Down Unknown Company

Kerrisdale Capital's Sahm Adrangi is no stranger to stirring up notoriety and self-promoting publicity if it helps generate inbound capital or profits. Back in 2013 New York magazine's spellbound Kevin Roose wrote an extended profile of the then-32 year old hedge fund manager and prominent short seller, describing him as "the hedge-fund world’s first full-on social-media-savvy investor can move markets with the flick of a tweet."

Adrangi, in imitating none other than Bill Ackman's Herbalife approach (which in retrospect may not be such a good thing these days) also has a habit of leaking "big" short announcement in advance to generate excitement and public attention, in hopes that once the name is revealed everyone will rush to short the company, allowing Adrangi to cover his pre-existing position.

Incidentally, Kerrisdale's target company in question was GSAT, which did tumble over 20% when its name was leaked and hasn't since recovered which is more than we can say about Herbalife.

Fast forward to today when we learn that Adrangi has synthesized all these components into his latest marketing gimmick: as Reuters reports Kerrisdale has raised approximately $100 million from investors to bet against a single stock.

The new Kerrisdale "co-investment" fund appears to be the first of its kind. Hedge fund managers sometimes raise money to focus on a particular investment thesis, such as the recovery of distressed energy companies or residential mortgaged-backed securities. "But Kerrisdale, a relatively small firm based in New York, plans to use the money to short the stock of a soon-to-be-unveiled public company."

Call it a "blind pool" for shorters or a BDC in which the B stands for Bear.

"We raised a meaningful amount of capital (in) a very short timeframe, so clearly we struck a chord within the alternatives community," Adrangi wrote in an email to investors Wednesday reviewed by Reuters. "We've taken a company that's worth north of $10 (billion), and we've endeavored to get everyone to understand the insights we have about it," Adrangi added in the note.

Adrangi and Shane Wilson, a Kerrisdale analyst focused on the upcoming campaign, are working on a report, video, website and more to convince others of their thesis, according to the email.

In other words, the Millennial version of Bill Ackman is doing all his best to follow in his role model's footsteps, from the 300 page presentation to the media spectacle associated with the announcement.

So which company is being shorted? It is unclear. The target company will be unveiled in mid-May, Reuters reported, citing a person who spoke on the condition of anonymity because the information was not intended for public release. 

As noted above and as Reuters affirms, Kerrisdale, which now manages approximately $500 million (including the new money raised), and up from $250 million as of September 2013, has a history of betting against companies and taking its case public. Some of its recent activist short positions include drug makers Sage Therapeutics Inc and Zafgen Inc, and satellite company Globalstar Inc.

So will this latest ploy to crush a company work? Well, if Kerrisdale's track record is any indication, it just may. According main hedge fund, which bets both for and against company stocks, has averaged an annual return of approximately 28% over the last five years, according to the person. That alone will likely be enough to generate at least a 20% drop in the stock upon unveiling.

On the other hand, the fund is down about 7% in 2016 through March, so it may not be such a sure thing, especially if the market realizes that as everyone else rushes to short company XYZ, Adrangi will most likely be covering. 

Incidentally, we have noticed that the best trading pattern for events such as these is to wait out until the first wave of selling ends, and then to aggressively buy it up as all the newly-created shorts (most of whom are HFTs) scramble to take profit and cover. Ironically, in revealing another "massive shorting opportunity", Adrangi may be guaranteeing one of the best intraday returns on the long-side.