Shortseller: Is the time of betting on falling prices over?

Hindenburg Research, one of the world's best-known and most controversial shortsellers, ceased operations in mid-January 2025 after around eight years. But not out of unsuccess, but quite the opposite: Founder Nate Anderson was “indescribably grateful”. What he and his team would have achieved at Hindenburg Research would have gone far beyond his imagination. So far that he no longer has to prove anything to anyone — and that he can therefore now close his company with peace of mind. The news was received with mixed feelings by financial market participants. While shortsellers may ask themselves whether the “boom phase” is perhaps over, some listed companies are relieved that the “Hindenburg threat” has been averted. For good reasons...

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How does shortselling actually work?

Hindenburg Research focused on activist short selling and the preparation of public reports in which the US company accused companies of fraud and other criminal practices. The reports were usually the result of months of intensive research. Such strategies are often used to expose overvalued or fraudulent companies, which can cause stock prices to plummet. However, shortsellers are also frequently criticized because they can trigger panic in the markets.

But how do these so-called short attacks actually work? For their “attacks,” shortsellers borrow stocks that they believe will fall and sell them immediately. They are therefore counting on the fact that they can buy back the stock cheaper before the return date. Your profit then consists of the difference between the sale and repurchase price. Behind this seemingly simple transaction is a complex infrastructure. Brokers, index funds, and other market participants act as lenders for the stocks, and the shortseller pays a fee for borrowing the shares. In addition, a fixed appointment is made in advance, on which the respective papers must be returned. The short seller can then sell them on the stock exchange at the current price.

Sometimes, however, markets react in a completely different way than expected. If prices rise instead of fall, shortsellers must, in the worst case scenario, buy back the securities at a more expensive price and thus realize a loss that can be almost indefinitely high.

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Historic Shortseller Coups

However, short attacks are also often successful. Companies such as Nikola, Wirecard and Tesla, for example, have recently been targeted by shortsellers:

• Nikola: Hindenburg Research published a report in September 2020 accusing electric vehicle startup Nikola of fraudulent practices. Probably the most well-known allegation was that Nikola was a Promotional video of a supposedly working truck that actually just rolled down a slope. After the report was published, Nikola shares plummeted by more than 40% within a few days. As a result, founder Trevor Milton resigned, and trust in the company was severely shaken.

• Wirecard: Wirecard was one of Germany's largest financial technology companies, up to shortsellers such as Fraser Perring and later the Financial Times Discrepancies in the balance sheet uncovered. The scandal escalated in 2020 when it became known that 1.9 billion euros were missing from escrow accounts in Asia. After BaFin initially tried to slow down Shortseller, Wirecard shares plummeted by over 90% following insolvency in June 2020 — from around 100 euros to a few cents. Shortsellers have made a lot of money and earns billions within a few days.

• Tesla: Tesla was one of the most-horted companies in the world for years. Especially in 2018, when the company had production problems, many shortsellers speculated that Tesla was doomed. But Elon Musk succeeded in stabilizing the company and ramping up production. Tesla shares rose massively in the following years, which led to huge losses for many shortsellers, as the share was able to increase by over 1000% by 2021 alone.

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Fewer activities with shortsellers

However, according to data from S3 Research, short sellers on the German stock market are currently rather cautious. For over a year now, the short volume has been hovering around 20 billion dollars. By way of comparison, in spring 2023, the volume was still over 45 billion dollars. A major factor in the decline in shortselling activities is the changed market structure. In recent years, government aid, a sustained flood of liquidity and optimistic retail investor movements — keyword: meme stocks such as GameStop — have made life difficult for shortsellers. Regulators are also stepping up action against aggressive short selling strategies, which further limits shortsellers' room for manoeuvre. In January 2025, however, there was a slight increase of 4% in Germany — possibly thanks to volatile markets, the shares of “stock market stars” such as tesla or Nvidia have added heavily.

Shortsellers were able to make significant profits in some cases. For example, hedge fund short sellers earned around 16.2 billion dollars from bets against Tesla within the first three months of this year, as the company's share price fell by around 50% over that period. Short sellers benefited similarly from Nvidia's price pullback between January and March 2025, which led to billions in income. As Yahoo Finance reported, citing data from S3 Partners, the price slump brought shortsellers more than four billion dollars.

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Are short selling an option for private investors?

In light of these figures, some retail investors are likely to ask themselves whether shortselling can make big money. Of course, betting on falling prices can be extremely lucrative, but it also involves significant risks. While in traditional equity investments, the loss is limited to the capital invested, in shorting, the losses can theoretically be unlimited if the price of the short-sold share rises sharply. Short selling also requires a high level of market knowledge, rapid response and good risk management. For these reasons, “The Big Short” bets are meaningful portfolio diversification in the long term Not recommended for private investors.

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