Diary of a short-seller: Viceroy’s many hits, few misses

Founded in 2016 by British short-seller Fraser John Perring along with Gabriel Bernarde and Aiden Lau, Viceroy calls itself an investigative financial research group. Since its scathing report on Australian miner Syrah Resources on 23 December, 2016, the Delaware-registered short-seller has issued reports on 29 additional companies, Vedanta being the latest. Incidentally, Vedanta is the first Indian company that Viceroy has flagged for alleged wrongdoing.

So, how does Viceroy, which first caught the world’s attention for flagging problems at German financial payments firm Wirecard, fare?

Six of the companies are trading at a higher price than when Viceroy first issued its report, according to a review of the reports and share performance by Mint. Fourteen still trade at a lower price after Viceroy’s report. The remaining nine companies have either been delisted, acquired, or suspended from trading.

In other words, only a fifth of the calls made by Viceroy have resulted in a loss, translating to an impressive 80% success rate.

At Hindenburg Research, which shut down in January, investor partners profited from three-quarters (75%) of its 45 investment calls (34 instances) over 60 months.

Short sellers typically borrow a stock, betting it will fall. If the stock indeed falls, the short seller repurchases the now-cheaper shares, returns them to the broker or lender, and pockets the profit.

In the case of Vedanta, Viceroy took a short position on the bonds of Vedanta Resources Ltd, the privately held holding company of Vedanta Ltd, the BSE-listed mining firm.

Vedanta rejected the Viceroy report, calling it a “malicious combination of selective misinformation and baseless allegations”.

Unlike short-sellers like Hindenburg and Muddy Waters Research and Citron Research, one thing stands out in Viceroy—All the short-sellers play the role of activist investors. However, they rarely put out more than one report on a single company.

Viceroy has put out more than one report on 23 of the 29 companies, a Mint review showed. The short-seller put out 25 reports on Arbor Realty Trust, the New York Stock Exchange-listed real estate investment trust (REIT) and 21 reports on Medical Properties Trust, another REIT. Finally, it released 28 reports on MiMedx, a Nasdaq-listed biopharmaceutical company.

Shares of Arbor, Medical Properties and MiMedx are down 10%, 67% and 43%, respectively from the time these reports were released.

This could spell trouble for public investors of Vedanta Ltd, as Viceroy’s co-founder, Perring, has warned of more reports in the coming days.

Perring told Mint that the co-founders opened a short position on the bonds of Vedanta Resources sometime in April in their personal capacity, and no investor is backing this campaign.

Short-sellers share their research with a select group of investors ahead of the public release, enabling them to take short positions and profit once the report is made available. Such firms earn a commission from the profits their investor partners generate.