Carson Block, founder of the research firm Muddy Waters, responded to speculations that he might launch his own hedge fund today. The famed short seller admitted that starting his own hedge fund was something he had been considering for some time. Block responded to questions about a possible hedge fund on Reuters TV today, as he appeared at the Reuters Global Investment 2013 Outlook Summit.
A spokesperson for Muddy Waters Research, contacted by Valuewalk.com, declined to comment on the story.
Block is famous for his intimate knowledge of Chinese firms, and his ability to pick out the ones that are behaving fraudulently. His most illustrious achievement to date was the calling out of the firm Sino-Forest Corporation for fraudulent accounting. That company’s eventual collapse cost John Paulson over $100 million.
If Block were to launch his own fund, it would be expected to concentrate on what he is already famed for, shorting companies in China with prominent positions in Western Portfolios. Currently, the analyst researches companies meticulously before shorting those his analysis suggests are committing fraud. He then publishes the research, hurting share prices and collecting big returns on the shorts that play out.
A hedge fund would allow Block to do this with not just his own money, but the money of his clients, that would make him a much more powerful player in the market, and would allow him to charge fees for the privilege. There are problems with such a strategy.
According to Block, fund manager Michael Steinhardt told him personally, ‘I shorted more stock than anybody else alive. But net-net over the years, I am flat on my shorts’. Nobody gets into an investment sector to come out even. Block may prefer not having to justify his bets to investors, staying away from the problems that plagued John Paulson after his Sino Forest disaster.
If Carson Block were to launch such a fund, it would help fill a gaping hole in the market. Many investors would like to avail his expertise before it reaches the public. Currently, Block publishes his research for free in order to affect the way the market values a company.
Attempting to find out whether or not a company is a fraud is a difficult process, and in China it can be much more labyrinthine. Block is one of the few researchers out there able to sniff these frauds out and get that information onto the market. If he were to launch a fund, it is probable a great many investors would be willing to get in on the ground floor.