New Short-Only Research Firm Rejects ‘Activist’ Business Model • Integrity Research

By Sanford Bragg February 17, 2021

As ‘activist’ research firm Citron Research shuts down its short research after being targeted by retail investors, a new short ideas firm, The Bindle Paper, is embracing a subscription-based revenue model that does not take short positions in researched names. Co-founded by veteran short investor Kurt Feshbach, the new firm champions classic short ideas research as an alternative to the ‘meme’ stocks under attack by Reddit-fueled day traders.

The Bindle Paper applies a disciplined approach based on Feshbach’s experience creating the first short-biased fund to exceed $1 billion in assets. The new firm plans to issue 8 – 12 initiation reports per year, focusing on liquid US stocks which don’t have large existing short positions. The firm takes a generalist approach but will avoid the biotech and natural resources sectors. All research will be fully attributed with references to publicly available sources.

“We publish privately only,” said co-founder Kurt Feshbach in an interview. “There’s no ‘short-activism’ on our part, no asset management strategy. We are simply researchers for an institutional audience.”

The Bindle Paper was founded 3 months ago and began publishing research in January 2021. The firm places heavy emphasis on compliance, implementing black-out periods for trading in covered stocks to enforce the firm’s no asset management strategy. It is also maintains insider trading policies to minimize the risk of receiving material non-public information.

The firm’s business model is subscription-based, which subscriptions starting at $37,000 for clients with under $1 billion in AUM. The firm has six staff and is self-funded.

Tough times for shorts

As The Bindle Paper launches, some short hedge funds have experienced large losses from surging prices in heavily-shorted stocks like Gamestop, which rose from under $20 to over $300 in the space of a few weeks. Veteran short research activist Andrew Left announced that Citron Research, one of the first research firms to take short positions in stocks before issuing reports, will no longer issue short-oriented research.

More broadly, hedge funds have struggled to generate alpha from short positions in the face of extended market gains fueled by central bank largesse. One of the largest dedicated short selling funds, Jim Carruthers’ Sophos Capital Management, is winding down and there are rumors that other short-focused funds are following suit. Short-biased funds were down an average of 48% in 2020, after losing 22% the year before, according to Chicago-based Hedge Fund Research.

Nevertheless, Feshbach is undeterred. “There is persistent demand for high quality short ideas,” he averred. “Long/short funds need to generate alpha from shorts to achieve absolute return, and now there are fewer high-caliber sources out there to source from.”

Our Take

The ‘meme stock’ trading frenzy validates The Bindle Paper’s strategy of eschewing an activist approach to short ideas research. The capital backing short-and-shout research firms like Citron Research and Muddy Waters creates questions about research authorship. Is the research generated in-house or simply regurgitated from friendly hedge funds that have already taken positions in the stock? A recent article in Institutional Investor on activist short research suggested that virtually all short-and-shout players are backed by dark money from hedge funds, with permutations of the model ranging from a cut of the gains on the short trade or a set fee.

The shortcomings in the activist model are a wind to The Bindle Paper’s back, but the broader environment remains daunting as markets continue to defy gravity and short-biased funds drop by the wayside. However, short-oriented research requires a deep contrarian bent and by this measure The Bindle Paper’s timing is perfect.

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