Short Selling And Information Warfare: A Bet Against America

There’s something of a contradiction at the heart of American capital markets.

The system we built to reward the builders also hands out fortunes to those betting on their collapse. Short sellers borrow shares, sell them, and depend on said company failing, faltering, or merely looking bad for long enough in order to make a profit.

The most memorable, recent short selling incident came back in 2021, when a group of hedge funds took massive short positions in GameStop, a brick and mortar videogame retailer. These hedge funds were simultaneously betting on and precipitating GameStop’s downfall.

They came close to succeeding before a group of social media users on the subreddit r/WallStreetBets noticed the gambit. Hundreds of thousands of retail investors bought GameStop stock for cheap, which juiced the stock price, saved the company, and set the multiple firms who had bet against GameStop on a path to certain financial ruin.

Ultimately, these firms survived when Robinhood, the etrading platform, banned its customers from buying (but not selling) GameStop stock.

The episode illustrates why short sellers are often loathed by the public. When Main Street builds a company, Wall Street short sellers can swoop in and profit from tearing it down. And that teardown is often based purely on reports made to move the stock rather than inform the public. Firms like Muddy Waters and Hindenburg Research built reputations (and fortunes) on this model, and even when their targets were legitimately troubled, the incentive structure is unaffected. The worse the outcome for employees and shareholders, the better the payday for the short seller.

Since the GameStop saga, nowhere has this tension been clearer than in the newer hybrid of “activist journalism” hedge funds. As in, firms that have fused investigative reporting with proprietary trading.

Hunterbrook Capital and its media arm, Hunterbrook Media, are the clearest example. By the firm’s own account, its journalists investigate companies so that its traders can act on what they find before publication. That is to say, before the public has access to the same information, which is a structure that completely flips journalism’s traditional purpose on its head.

This is a firm whose modus operandi is scrutiny until story. For them, reporting has become a proprietary trading signal, produced by a newsroom that is financially better off if their story moves markets in the fund’s favor.