Short Sellers Back In The Saddle: Q&A With Bearing Asset Management

The improbable success of The Big Short, a scathing and hilarious tutorial on making money during a financial crisis, probably has a lot of people thinking that now might be a good time to start betting against the current bubble(s).

That’s a well-timed thought because it comes after three long years in which shorting was really, really hard. Why was it hard? Because easy money — at first — floats all boats. When interest rates are low and financing is readily available, even the crappiest companies can pay their bond interest and support their share price with debt-fueled share repurchases. The uniformity of the past few years’ bull market was so extreme that buying the most heavily-shorted stocks — on the assumption that those companies would have access to sufficient capital to support their market value, thus forcing the shorts to cover at ever-higher prices — was a successful and widely-practiced strategy.

But as Warren Buffett likes to say, when the tide goes out you see who’s swimming naked. And in the past year, as the US stopped quantitatively easing, China stopped buying commodities and oil tanked, the tide has gone out with a vengeance. Already, the Russell 2000 index of small-cap stocks is down 22 percent from its cycle high and fully half of the S&P 500 is down more than 20%.

Long-suffering short sellers, as a result, now find themselves in a target-rich environment reminiscent of The Big Short’s final act. Dallas-based Bearing Fund is a case in point. After a “humbling” couple of years, partners Bill Laggner and Kevin Duffy have ridden some high-profile short positions (including SunEdision, Wynn Resorts and Valeant) to big gains, with — if this bubble deflates according to the standard script — much more still to come. Here’s a short Q&A compiled from an exchange of emails:

DollarCollapse: The past few years have been tough for short sellers. But during 2015 that changed in a big way. What happened?