Hindenburg's Short Selling Playbook: What You Need to Know and Recent Updates

Hindenburg's Short Selling: Short selling is a trading strategy used in the stock market where traders bet that a stock's price will fall. Traders who use this strategy are called short sellers. They borrow shares of a stock from a broker and sell them, hoping to buy them back later at a lower price. If the stock price drops as expected, they make a profit. However, if the price goes up, they face potential losses since they have to buy back the shares at a higher price to return to the broker.

How Does Short Selling Work?

1. Obtaining Shares: Short sellers obtain shares from a broker through a borrowing arrangement.
2. Selling High: They sell these borrowed shares at the current market price.
3. Buying Back Low: If the stock price falls, they buy back the shares at this lower price.
4. Returning Shares: They return the shares to the broker and keep the difference as profit.

This strategy carries high risks, as losses can be unlimited if the stock price rises instead of falling.

Why Do Traders Short Sell?

Traders might short sell to speculate on market movements or to hedge against potential losses in their other investments.

Costs of Short Selling

Traders must pay interest on the borrowed shares for the duration of the trade. In India, as per the Securities and Exchange Board of India (SEBI) guidelines issued on January 5, 2024, all investors, including retail and institutional, are allowed to short sell.

Case Study: Hindenburg's Short Selling

Nathan Anderson's firm, Hindenburg Research, took a short position against the Adani Group, resulting in a significant decline of about $153 billion in the companies' market value. Hindenburg earned over $4 million from this trade. Kingdon Capital Management, which had early access to the Hindenburg report, agreed to share 30% of the profits with Hindenburg. Kingdon has already transferred $4.1 million, with an additional $1.4 million pending.

Also read: SEBI Refutes Hindenburg Allegations Against Chairperson Madhabi Puri

Recent Updates

On August 10, Hindenburg released an updated report alleging that SEBI Chairperson Madhabi Puri Buch had links to offshore entities involved in money laundering. SEBI responded, denying any wrongdoing by the Chairperson and affirming that she had made all necessary disclosures and recused herself from potential conflicts of interest.