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The man behind a $50 billion sell-off

Nathan Anderson, photographed on 6 January 2023 in New York. Anderson exposes corporate fraud and ponzi schemes through his company Hindenburg Research.  (Getty images)Premium
Nathan Anderson, photographed on 6 January 2023 in New York. Anderson exposes corporate fraud and ponzi schemes through his company Hindenburg Research. (Getty images)

  • Who is Nathan Anderson and why have Indian investors sold shares in response to a report by him?
  • Hindenburg is among the youngest firms to make a name in the space of short sellers. It competes with Carson Block of Muddy Waters Research and Andrew Left of Citron Research

BENGALURU : The antecedents and credentials of New York-heardquartered short-selling research firm Hindenburg, whose bearish take on the Adani group has set off a firestorm in Indian capital markets, prompting a $50 billion sell-off in equities, has piqued the curiosity of Indian investors.

Short-selling, in which investors bet on the price of a stock going down, and often talks down the prospects of the company, has long been controversial. But it is acknowledged as an effective mechanism that keeps markets efficient. It’s only directionally different from a pundit talking up a stock on TV.

While domestic observers may deride or praise Hindenburg, depending on their own views, what leaps out at you on perusal of the firm’s work is how prolific it is in churning out research reports.

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Since Nathan Anderson started Hindenburg as a standalone research firm in December 2017, the firm has put out notes on 45 companies, according to an executive and review of the reports by Mint.

Anderson has said in past interviews that Hindenburg has six employees. That means an average of nine reports per employee per year.

The firm’s name is an allusion to the nature of its work. The company’s site says it’s named after the “epitome of a totally man-made, totally avoidable disaster". That was the Hindenberg airship accident of 1937, which killed 37 people in New Jersey, US.

Sound record

The firm can be pleased with its track record.

Three-quarters (75%) of 45 investment calls (34 instances) by Hindenburg in the last 60 months have helped its investor-partners profit. Significantly, short sellers won big (target stock down more than 50%) at least 29 out of the total 34 times. Only four stocks have surged more than 50% since Hindenburg put out a note.

Firms such as Hindenburg typically shares its research with a small pool of investors ahead of the public release, allowing them to take short positions and profit once the report is released. Such firms make a commission off the profits its investor-partners make—it’s akin to a subscription fee. But it’s a high-risk gambit. If the stock moves up instead, investors can get caught in what is known as a short squeeze.

“This success rate of more than 75% is actually a very impressive number," said an investor who works with a New York-based hedge fund. “So say someone like Elliott (Capital Management) would do two or three short trades a year and have a more than 90% success rate."

‘Overseas conglomerate’

In January 2022, a 6,500-word profile piece of Nathan Anderson was featured in the New York Magazine. The piece carried the following paragraph.

“ … In recent months, he has kept me abreast of Hindenburg’s work on a forensic project involving an overseas conglomerate. “We just downloaded the entire Mauritius corporate registry," he told me in late November. “It’s a pretty extensive web." He was still figuring out how he would be able to profit from the investigation’s findings, whenever it ultimately came to completion."

That unnamed conglomerate, it now turns out, was Adani Group, whose founder Gautam Adani was, until the start of last week, the world’s third-richest businessman.

On 25 January, Anderson’s research firm Hindenburg released a devastating report, titled “How The World’s 3rd Richest Man is Pulling The Largest Con in Corporate History".

Over two trading days (25 and 27 January), the 10 listed entities owned by Adani lost between 5% and 25%.

Adani group has called Hindenburg’s allegations malicious and fabricated, and published a detailed rebuttal of its charges Sunday night.

“I can confirm that, yes, when I started writing my article about Hindenburg (in approximately September 2021), he told me that they were working on an investigation of Adani, which he said at the time would be a long-term project," Andrew Rice, the author of the piece, told Mint.

“He (Nathan Anderson) mentioned that they had downloaded the entire Mauritius corporate registry as part of their investigative process and were in the midst of trying to figure out Adani’s web of corporate relationships. He kept me updated on the progress of the investigation throughout my reporting process. I had hoped that his report would appear in time to be included in my article, but at the time he said he had no idea when (or if) it would be complete."

Rice said he couldn’t say what might have motivated the timing of the report’s release. “I can’t comment on why the report appeared at this moment, because I don’t know, but I can definitively confirm Mr. Anderson was talking about the investigation in progress roughly 15-16 months ago"

But many investors conclude that the timing of the report—released less than 48 hours before the group’s flagship firm, Adani Enterprises, was to kick off its 20,000 crore ($2.4 billion) secondary sale of shares on Friday—leaves it open to debate if it was done to derail what is billed as the country’s largest follow-on-public sale of shares.

This was because Hindenburg had also decided to profit from its two-year research.

“After extensive research, we have taken a short position in Adani Group companies through US-traded bonds and non-Indian-traded derivative instruments," Hindenburg said in its note.

Selling short

India has not been witness to this kind of short sellers before. Normally, short sellers borrow a stock, betting it will fall. If the stock indeed falls, the short seller buys the now-cheaper shares back, returns them to the broker or lender, and pockets the profit.

There are two varied tribes of these short-sellers.

At the top of the pyramid are the hedge funds or activist funds. Feared activist investor Elliott Management and Bill Ackman’s Pershing Square Capital Management are a few examples. These large firms also have a few celebrated individuals who have made a name for themselves through large and famous contrarian calls. Jim Chanos of Kynikos Associates (whose decision to sell Enron shares before the company’s collapse in 2001) and Michael Burry, founder of Scion Capital (who profited from the subprime mortgages in 2007 and 2008) are two such names. Burry, however, also lost money shorting Tesla stock more recently, illustrating the risk involved in this tactic.

Closer home, Reliance Industries Ltd founder Dhirubhai Ambani is renowned to have taken the battle to a block of bears in the early 1980s, led by Manu Manek, who were driving down the RIL stock. He rallied supporters who drove the stock up, causing massive losses to the bears.

Anderson’s firm is among the youngest to make a name for itself in the space of short sellers and competes with Carson Block of Muddy Waters Research and Andrew Left of Citron Research.

Their calls can prove disruptive to companies and are therefore loathed by targeted managements and investors in such companies alike.

“It is not easy being a short seller fundamentally for two reasons," said a New York-based fund manager, who has previously worked at a short seller firm. “First, because there is an inordinate amount of work you need to do. Second, you are betting against the market, which by nature has an upwards bias, and you are betting against the very nature of the market."

Before the bet on Adani, Hindenburg’s most prominent short attack was the one that targeted Nikola, in which it accused the electric-truck maker of “an ocean of lies." Nikola, which at one point had a $34 billion market value, is now worth $1.3 billion, and a US jury convicted founder Trevor Milton of defrauding investors in October.

Hindenburg first researches a target firm, betting its stock will fall, and then promotes its findings publicly through social media.

Since Hindenburg research first tweeted about its report on Adani, on 25 January, almost a million people saw the tweet in the first five days.

But unlike most short-sellers deciding to trade into the equity of a stock, Hindenburg has taken a short position in bonds raised by Adani and that are available for trading in the US and other non-Indian-traded derivative instruments.

There are two reasons.

Firstly, it appears Hindenburg and some of its investors may not have the license to buy and sell stocks from India’s market regulator, the Securities and Exchange Board of India.

A related reason is that had Hindenburg actually taken a short call on the stocks of the 10 listed entities owned by Adani, it would have attracted the jurisdiction of the market regulator, which frowns and does not allow betting a stock will fall beyond intra-day calls.

A bigger reason for this trade of bonds is that it limits losses if Hindenburg’s call goes wrong while the upside on profits is immense if it gets it right.

Put simply, the overseas bond markets are a fair playing ground for short sellers, as overseas market regulators give both short sellers and long buyers a level playing field.

This becomes significant in case of Adani Group as US dollar bonds and Rupee Bonds accounted for 37% of the 2 trillion ($24 billion) debt of the five listed entities, including Adani Enterprises, Adani Ports, Adani Power, Adani Green and Adani Transmission, according to a CLSA note, dated 26 January.

Corporate bonds are financial instruments that allow a company to raise money from investors. A company pays interest on principal and returns the borrowed amount when the bond comes due or matures.

Unlike buying shares, which allow investors to own equity in the company, corporate bonds do not let investors buy a stake of a firm. While shareholders’ wealth is a function of how a stock performs, bonds assure investors of a fixed income which the company has agreed to pay as interest on the principal sum of money borrowed.

It is still imperative for a company that is highly leveraged to pay its bondholders on time, even if it is having difficulty paying back its debt. Suppose a company borrows $1 million at 5% annual interest. Any news that the company has trouble repaying its creditors will drive down bond prices and drive up bond yields.

To be sure, Adani Group does not appear to be in danger of default, as its cash flow exceeds the interest costs on its total borrowings by a wide margin.

With Hindenburg declaring it has shorted Adani bonds, and if they succeed in driving down the Indian group’s bonds and thus driving up the yield, it may have to consider alternative modes to borrow or refinance its debt. To begin with, Adani bonds’ yields rose marginally by four basis points since the report surfaced on Wednesday.

A continuation of this trend in the coming days may make future bond offerings by the Adani Group more expensive than in the past.

Second act

This is in fact not the first time Anderson is clashing with Indian businessmen. Prior to Hindenburg, Anderson ran another firm called ClaritySpring Inc, a database that sought to connect small funds with institutional investors. By December 2018, he was looking to shut ClaritySpring and had already started working on the model of poking holes at a listed company’s story and then working with some short sellers.

Eros International Plc, the New York Stock Exchange-listed subsidiary of the Indian movie production firm Eros, filed a defamation case against a group of short sellers and ClaritySpring in a court in New York in 2017. According to the lawsuit, a copy of which was reviewed by Mint, Anderson had published three articles under the name Hindenburg Research in July and August 2017, and also followed up with his tweets.

The Twitter handle of Hindenburg was made in July 2017. The petition by Eros was dismissed by the judge.

Anderson did not respond to a detailed questionnaire.

Although Anderson in earlier interviews has mentioned that he works with a group of 10 like-minded investors, there is no publicly available information on the research group’s financials, employees or the names of the investors.

ABOUT THE AUTHOR
Varun Sood
Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
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