Short seller Jim Chanos to close his main hedge funds

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One of Wall Street’s best-known bears, Jim Chanos, has told his backers he is closing his main short-focused hedge funds after more than three decades.

Chanos is best-known for his bet against Enron, the energy trader that collapsed in 2001, as well as for his more recent, but unsuccessful, campaign against electric-car maker Tesla, which he described as a “circus”.

In a letter to investors seen by the Financial Times, Chanos wrote: “It is no secret that the long/short equity business model has come under pressure and interest in fundamental stock pickers has waned.”

He added: “While I am as passionate as ever about research and investing, I feel compelled to pursue these passions in a different construct.”

Chanos, 66, said the bulk of the funds would be returned to investors by year-end. He will continue to offer bespoke advice on fundamental short ideas as well as some macro insights.

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His decision to close the funds was first reported by The Wall Street Journal.

“Even in the face of multi‐year market euphoria, we have worked hard to meet your and our shared expectations,” Chanos said.

In his letter, he said his short holdings had generated annualised alpha — outperformance relative to broad market indices such as the S&P 500 and Russell 2000 — of about 8 per cent since the 2018 market bottom and more than 20 per cent over the past three years.

“These results, despite zero-interest rate policy, meme stock mania, and more, remain ahead of virtually all hedge fund industry return indices,” he added.

Short sellers aim to profit from falling prices, borrowing shares in a bet that their value will have dropped by the time they return them. While an established element of the financial markets, it has always attracted controversy, often from the executives of the companies targeted.

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Chanos’s relatively high public profile contrasts with the lower-key approach taken by many short sellers, who rely heavily on social media — a tool not available to Chanos during his first two decades in the industry — to spread their warnings of perceived overvalued or fraudulent investments.

Despite some prominent losing bets like Tesla and some large technology companies, Chanos never lost his sceptical bent, telling the FT in 2020 that “we are in the golden age of fraud”. A week before, his funds had made $100mn shorting German payments company Wirecard, which filed for bankruptcy after admitting that most of its cash did not exist. Wirecard’s collapse followed a five-year investigation by the FT into its accounting.

Chanos set up his original fund Kynikos Associates in 1985, using a Greek word that is associated with cynicism.

His most famous bet, Enron, came after he was troubled by disclosures that suggested off-balance sheet financing. A surprise loss reported by the Wall Street darling late in 2001 prompted a regulatory probe and ultimately, its collapse amid fraud that resulted in several executives being jailed.

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Ahead of the 2008 financial crisis, Chanos had also warned about the risks of a credit crisis.

Last year he shorted data centres despite their popularity among investors, including big-name private equity groups, which bet on a rise in demand for server space as online activity soared.

Chanos told the FT he was shorting older data centres because their biggest customers, Microsoft, Amazon and Google, were likely to build their own in future, reducing demand for existing sites.