Short sellers raise the stakes against SPACs


Short sellers come for the SPACs.

Investors betting against stocks are targeting special-purpose takeovers, one of the fastest-growing areas on Wall Street. The dollar value of the bearish bets against SPAC shares has more than tripled to around $ 2.7 billion from $ 724 million earlier in the year, according to data from S3 Partners.

Some of the stocks under attack belong to large SPACs that soared in recent months, in part because they were backed by high-profile financiers. A blank check company created by venture capitalist Chamath Palihapitiya that plans to merge with loan startup Social Finance Inc. is a popular target, with 19% of its outstanding shares being shorted, according to data from S&P Global Market. Intelligence. The short interest in Churchill Capital Corp. IV,

a SPAC created by former investment banker Michael Klein that is merging with electric vehicle startup Lucid, doubled in March to about 5%.

Others bet against companies after they combine with SPACs. Muddy Waters Capital LLC announced last week that it was betting against XL Fleet Corp.

, a fleet electrification company that went public in December after merging with a SPAC. Since then, XL has said that the Muddy Waters report, which alleged that XL inflated its sales channel and made misleading claims about its technology, among other problems, had “numerous inaccuracies.”

XL’s stock price fell the day Muddy Waters released its report by about 13%, to $ 13.86, from its previous close on March 2. The shares closed at $ 12.79 on Friday.

Lordstown Motors Stock Corp.

It fell nearly 17% on Friday after Hindenburg Research released a report saying the electric truck startup had misled investors about their orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. Short interest in Lordstown shares rose to 5% from 3.4% the week before the report was released, according to S&P data.

“SPACs are an area of ​​interest,” said Muddy Waters’ Carson Block. The veteran short seller said SPACs are largely the universe of companies that he considers both “abysmal” and relatively free of technical challenges, such as high short interest, which can make betting against him difficult.

SPACs are shell companies that raise capital by issuing shares for the sole purpose of purchasing or merging with a private company to go public. They are dominating the market for new stock issues, becoming a status symbol for celebrities while increasing the value of acquisitions, like a gambling company.

DraftKings Inc.,

in tens of billions of dollars.

Hedge funds that buy SPAC up front see them as a way to get high returns without much risk. Individual investors are attracted by the opportunity to obtain positions in publicly traded companies that they would rarely be able to buy through traditional IPOs. The Securities and Exchange Commission issued a statement Wednesday warning that “it is never a good idea to invest in a SPAC just because someone famous is sponsoring or investing in it.”

A month-long rally in equities recently lost steam amid a broad selloff at tech and high-growth companies. A SPAC stock index traded by Indxx fell roughly 17% from mid-February to March 10, while the Nasdaq Composite Index declined roughly 7.3% over the same period.

“These are all impulse stocks, and a lot of people want to sell them short,” said Matthew Tuttle, whose firm Tuttle Tactical Management manages an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that bets against the “de-SPAC” shares of companies that have merged with a SPAC, such as electric truck maker Nikola. Corp.

and baked goods maker Hostess Brands Inc.

“And a separate fund that invests in stocks.”

Private companies are flooding into Special Purpose Acquisition Companies, or SPACs, to avoid the traditional IPO process and obtain a public listing. WSJ explains why some critics say investing in these so-called blank check companies is not worth the risk. Illustration: Zoë Soriano / WSJ

Post-merger companies are particularly attractive to short positions because they have higher market capitalizations, making their shares easier to borrow, and because early investors in SPACs are eager to sell shares to secure profits. analysts and fund managers said.

Short sellers borrow shares they believe are overvalued and sell them immediately, hoping to buy back the shares at a lower price when they need to be paid back and keep the difference. The strategy proved dangerous in recent months as individual investors organized on social media to boost stocks like GameStop Corp., forcing short sellers to buy stocks and limit their losses, helping to push prices even further. plus.

Continued strong investor demand for SPAC could trap short sellers in a similar situation. Shorting SPACs can also be risky because their shares have a natural bottom of $ 10, the price at which they can be traded before a merger, and because they are prone to price shocks, analysts said.

Still, the portion of shares sold short in SPAC and its acquisitions is increasing.

A blank check company created by venture capitalist Chamath Palihapitiya who plans to merge with loan startup Social Finance Inc. is a popular target.


Photo:

Brendan McDermid / Reuters

Some are betting against stocks they believe rose too fast, at unsustainable valuations. The price of the bioplastics company Danimer Scientific Inc.

it nearly tripled to $ 64 in the first six weeks of the year after it was purchased by a SPAC. Short interest in Danimer’s shares has risen to 8.5% from around 1% in January, and its share price has traded around $ 42, according to S&P data.

Others are making bear bets to hedge against potential losses on the SPAC shares they own.

Veteran short seller Eduardo Marques cited SPACs and their surge in the number of U.S.-listed stocks as a short-selling opportunity, according to a speech to a stock-picking hedge fund called Pertento that he plans to launch this year. . America’s list of public companies had shrunk from the mid-1990s onwards, but that trend has been reversed recently, in part because of SPACs.

Its popularity has helped generate new offers on Wall Street. Goldman Sachs Group Inc.

This year it began offering clients baskets of similar stocks short, presenting them as a way to hedge exposure to SPAC, people who saw the offer said. Customers often customize the baskets offered by Goldman, which are themed and industry-focused, such as bitcoin and electric vehicles.

Kerrisdale Capital founder Sahm Adrangi began shorting post-merger SPAC companies earlier than most, with a public bet in November against shares of frozen food maker Tattooed Chef. Inc.,

which is still trading above its price at that time. But the stock has fallen about 13% during the recent market crash.

“We saw these stocks go up a lot and now that people are reducing risk, these high-flying SPACs are coming down to the ground,” Adrangi said.

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Write to Matt Wirz at [email protected] and Juliet Chung at [email protected]

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