The Soaring Margin Debt; Carson Block’s Rage

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Whitney Tilson’s email to investors discussig the soaring margin debt; the rage of Carson Block.

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Q1 2021 hedge fund letters, conferences and more

The Soaring Margin Debt

1) Activist short seller Nate Anderson recently published this interesting tweet and accompanying chart on the soaring margin debt:

Soaring Debt

Soaring Debt

The Rage of Carson Block

2) Speaking of activist short sellers, Michelle Celarier of Institutional Investor recently published this in-depth profile of my friend Carson Block of Muddy Waters Research: The Rage of Carson Block. Excerpt:

A year before Carson Block launched Muddy Waters Capital, his hedge fund firm, he started trying to line up a prime broker – an investment bank that could lend him stocks so he could then sell them short. But the task was proving arduous.

The problem: Block had made his name calling out China frauds, and Wall Street loved China.

After several bulge-bracket banks turned him down, Block decided to try his luck with Jefferies Financial Group, a scrappy up-and-comer known for its trading skill. Muddy Waters, then only a research firm, was based in San Francisco, so he arranged an interview with Jefferies CEO Rich Handler on his next visit to New York City.

In my e-mails on May 20 and July 17 last year, I highlighted Carson's work exposing Chinese education company GSX Techedu (GSX) – and the pain he was taking as the stock ripped upwards. Here are Carson's comments on it in the article:

Block isn't one to give up, so he began trying to figure out what was going on. Was it high-frequency trading? Passive flows from index funds and exchange-traded funds carrying the stock higher?

While he believes both played a role, last summer Block also learned from two insiders in the U.S.-China investment world that some Tiger Cubs – including Bill Hwang, who had been running a family office called Archegos Capital Management since settling insider-trading charges, and his protégé Tao Li, who runs hedge fund Teng Yue Partners – were behind the runup. Hwang and Li used highly leveraged swaps to conceal their positions. Another Tiger Cub, Chase Coleman's Tiger Global Management, was also one of GSX's top shareholders.

Meanwhile, the founder of Singapore-based QQQ Capital Management admitted in a now-deleted tweet that he was trying to squeeze shorts by selling GSX puts.

"Everyone knows GSX is a fraud," says Block. "The problem is the hedge-fund players who decided to squeeze the shorts."

In late March, GSX shares tanked, a victim of the massive liquidation of Hwang's portfolio, creating a fair amount of schadenfreude at Muddy Waters. Notably, the big investment banks, known to have extended Archegos so much leverage, refused to do business with Muddy Waters, according to Block.

Carson has once again been proven right, as the stock has imploded. From a peak of more than $100 as recently as two months ago (I added it to my "Short Squeeze Bubble Basket" in January 27 at $142.70), it now sits at $27.07 per share as of Friday's close.