The views expressed here are those of the author, the publisher of Income Securities Advisor.
By Marty Fridson
NEW YORK, March 12 (Reuters) - The last three years have been a wonderful time to own U.S. stocks. The S&P 500 returned about 22% a year between 2022 and 2025. For short sellers - those betting on falling prices - the environment has been far more punishing.
Some of the best-known short-focused firms have either retreated or shut down. Jim Chanos' Kynikos Associates closed its main hedge funds in 2023, citing pressure on the long/short equity model. By then, Pershing Square's Bill Ackman had already sworn off activist short campaigns. And last year Hindenburg Research founder Nathan Anderson announced that he was disbanding his firm.
Short sellers have historically been cast as the “bad guys”, those rooting for companies to fail so that the “shorts” can benefit at the expense of long-only investors - the vast majority of market participants.
All the way back in 1929, short sellers were widely blamed for deepening the stock market crash. President Herbert Hoover excoriated them for supposedly helping to plunge the country into distress by pummelling security prices.
More recently, in March 2025, Kyndryl Holdings KD.N blasted a bearish report on its business by short‑focused Gotham City Research. The IT services provider rejected Gotham's claim that it was using deceptive accounting to create an illusion of profitability, calling the allegations “deliberately misleading” and “designed to manipulate the company's stock.”
However, it turned out that investors would have benefited from heeding the short-oriented research shop’s warning that Kyndryl appeared to be grossly overvalued. On February 9, 2026, Kyndryl's chief financial officer and general counsel both resigned amid news of a Securities and Exchange Commission inquiry into its accounting practices. That day, the share price plummeted from $23.49 to $10.59.
NORMAL SELLING ALONE CAN'T PREVENT BUBBLES
The instinctive dislike of short sellers is understandable. But their disappearance would not necessarily make life better for long-only investors. Going long a stock when it’s severely overvalued can prove extremely costly. Short sellers can reduce investors’ risk by helping push prices down to a more reasonable level.
Critics might argue that short sellers are unnecessary because markets already have a natural check on overvaluation. After all, for every buyer there is a seller, and the seller, by definition, must think the stock is no longer worth holding at the current price. Doesn’t that prevent a stock from becoming objectively overvalued?
The flaw in this argument is that value isn’t always the primary consideration behind a sale. Some investors take profits for tax reasons or to raise cash for personal needs. Others follow short-term trading strategies designed to capitalize on tiny price moves, with little or no regard to intrinsic value.
Such investors won’t drive down a stock that’s unreasonably inflated by the latest investment fad, especially if buyers are ignoring telltale signs that reported profits have been exaggerated through accounting gimmickry.
Correcting an overvaluation under those conditions requires proactive selling, which isn’t feasible if short sales are prohibited. Under such a ban, a trader aiming to push the stock lower by selling would first have to buy it, which would defeat the purpose.
The popular image of short sellers as wealth destroyers is therefore mistaken. In reality, they discourage the bandwagon effect, whereby masses of enthusiastic buyers jump into a stock at a wildly excessive price and subsequently suffer a massive wipeout.
Of course, short sellers are not selfless heroes working for the common good. They are seeking to make a profit, just like any investor, and heavy shorting can potentially worsen market stress. That may warrant reasonable regulation, but not the driving out of informed skeptics who help keep prices tied to reality.
A COMEBACK FOR SKEPTICS?
Could we soon see a reversal of the recent contraction in short sellers’ ranks?
There are certainly signs that investor optimism about frothy valuations is being tested.
As of March 9, the previously high-flying Magnificent Seven tech stocks were down by an average of 11% from their 2026 highs.
Meanwhile, shares of leading lenders in the private-credit market have also lost their luster, as investors worry about these firms’ substantial exposure to software producers threatened by advances in artificial intelligence.
At the iConnections Global Alts conference late last month, Dan Loeb, the CEO of hedge fund Third Point, proclaimed, “The lost art of short selling has come back and it’s absolutely critical this year.”
If he is right, long-only investors may experience a bit more volatility in the coming months. But they may also get help avoiding devastating losses in stocks that temporarily detach from their fundamentals before nose-diving back to fair value.
(The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.)
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.
And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.
(Writing by Marty Fridson; Editing by Marguerita Choy and Anna Szymanski.)
((anna.szymanski@thomsonreuters.com))
Comments