Carson Block’s ‘Insane Alpha’ Fades in Bad Year for Short Bets

(Bloomberg) — Carson Block is having an unusually tough time betting against Chinese stocks.


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The famed short seller’s recent calls to unload shares of GSX Techedu Inc., TAL Education Group and Joyy Inc. have largely backfired after the stocks rallied following brief dips when his reports were first posted.

“GSX, after we reported it, tripled,” Block said in an interview with Bloomberg Television. “There is clearly something wrong.”

Block, founder of Muddy Waters Research, isn’t questioning his methods. He blames options traders, small floats and investors taking advantage of low volumes to push the Chinese stocks back up after his calls.

The result has been a grim year of shorting China equities for Block, who earned his reputation following successful bets against companies like Noble Group Ltd., the commodities firm in Singapore, and Sino-Forest Corp., a Canada-based timber company that operated in China.

GSX, the online education firm that Muddy Waters called out in May, soared more than 200% through August before paring some of its gains. TAL Education has almost doubled since Block announced his short position more than two years ago.

GSX has said Muddy Waters doesn’t understand its business model. TAL Education called the report erroneous and deceptive.

chart: GSX rallies after short bets

© Bloomberg
GSX rallies after short bets

“Given the infamy of short sellers and unchanging methods, a short sell report essentially puts a bullseye on their back asking for a short squeeze,” Justin Tang, head of Asian research at United First Partners, said in an email. He also noted the impact of the recent market rally. “Short sellers are swimming against the current at the moment, given the overhang lifting from the U.S. elections and the coronavirus vaccine.”

The trend is playing out again with Joyy, the streaming service that plunged 26% on Nov. 18 when Muddy Waters announced its short call. The stock is crawling back, down just 12% since before the call, eroding gains from Block’s short bet.

Block said Joyy is a “fraud” that’s a zero since 90% of the “gifters” who are allegedly paying for entertainment on Joyy’s servers are robots.

“The reality is that the vast, vast, vast majority of the gifters are fake and the money is round tripped and recycled” Block said in the interview with Erik Schatzker.

Joyy has said Block doesn’t understand the way streaming services work in China.

“Muddy Waters’s report is full of ignorance about the live-streaming industry and the live-streaming ecosystem,” Joyy said in a statement. “The report contains a large number of errors with unclear logic, confusing data, and hasty generalizations.”

Insane Alpha

Block says about 65% of the names he has shorted over the past decade have declined in the long term, generating added value, or alpha, for his clients. One of his notable winners this year was in China — Luckin Coffee Inc. is down almost 90% since his January bet.

“What we short generates pretty insane alpha,” he said, without elaborating on his returns. “This year, all bets are off.”

Matt Wiechert, founder of Bonitas Research LLC, agreed it’s been difficult to short stocks in China this year, with the pandemic making it harder for proper due diligence to detect potential fraud.

“This has been an unusually tough year staying short Chinese stocks,” he said in a phone interview. “Investors seem to be caring less about owning frauds than in previous years.”

Block meanwhile reiterated his call for the U.S. Securities & Exchange Commission to delist the Chinese firms that it can’t properly monitor.

“This is China and the Chinese stock promotion, manipulation fraud machine laughing in the face of the SEC,” he said. “If they are ripping us off, then we need to delist. Otherwise this is a total joke and what’s the point of the market?”

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