The corporate headquarters of payments processor Wirecard
The failure of German technology group Wirecard in 2020 yielded short sellers more than €1bn of profit in a week © Christian Ender/Getty Images

Two of the biggest names in short selling are joining forces to launch a new hedge fund, betting that a downturn in markets will help them replicate their successful wagers against companies such as Wirecard and Steinhoff.

Dan Yu, founder of research firm Gotham City Research, and Cyrus De Weck, who set up Portsea Asset Management, are planning to launch General Industrial Partners early next year, according people familiar with the matter.

Gotham City is well known for its campaigns against Spanish WiFi provider Let’s Gowex, which later filed for bankruptcy and admitted its accounts had been falsified, and insurance claims processor Quindell. Portsea bet against stocks such as NMC Health, the former FTSE 100 group that went into administration in 2020 after the revelation of a multibillion-dollar fraud.

Both have also bet against Steinhoff, the South African group whose shares collapsed after accounting irregularities were revealed in 2017, and Wirecard, the German technology group whose failure in 2020 yielded short sellers more than €1bn of profit in a week.

The new firm is set to launch early next year and will be one of a handful of hedge funds focused on short selling. It will hold a portfolio of 15 to 20 short positions, hedged by holding baskets or indices of stocks. When Yu and De Weck find what they believe to be a particularly compelling target, they may take a very concentrated bet against the stock in a separate vehicle.

The launch comes after a bruising period for short sellers, with many funds having struggled to profit from the strategy during a lengthy bull run punctuated by periods of exuberance in which the stock market appeared to pay scant attention to the quality of companies.

In 2020 London-based Lansdowne Partners stopped short selling in its flagship fund, saying it had become harder to find attractive bets against overpriced companies.

Last year the short bets by some hedge funds, notably Melvin Capital, backfired during the meme stock frenzy. In addition, the US Department of Justice has been investigating possible trading abuses relating to short selling, while the Securities and Exchange Commission has proposed forcing funds to disclose more information about their bets.

Nevertheless, some managers believe that, with stocks in a bear market, short selling is set to flourish as rising interest rates begin to expose weak business models. Martin Stapleton, another respected short seller within the industry, last year raised capital for a new fund in London, Perbak Capital Partners.

“There is a generation of market participants who, following 14 years of QE [quantitative easing], are ill-equipped to handle the QT [quantitative tightening] transition,” GIP wrote in a presentation to potential investors seen by the Financial Times.

While GIP plans to go public with a small number of its positions, most bets will be kept private. The new hedge fund only plans to charge expenses to investors, plus a performance fee when it makes money. This approach means that, if GIP loses money, Yu and De Weck would not receive a salary.

Yu and De Weck declined to comment.

Portsea, which made money from shorting firms with accounting issues in six of the past seven years, wrote to its investors this week with details of the launch of the fund. Those moving to GIP will keep their so-called high-water mark, a mechanism designed to protect investors who have suffered a previous loss from paying any more performance fees before they are made whole.

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article