Short sellers are arriving for SPACs.
Investors betting against the shares target special-purpose takeover companies, one of the fastest growing areas on Wall Street. The dollar value of bearish bets against SPAC shares has more than tripled to about $ 2.7 billion from $ 724 million at the beginning of the year, according to data from S3 Partners.
Some of the stocks under attack belong to large SPACs that have increased in recent months, in part because they were backed by high-profile financiers. A blank check company created by venture capitalist Chamath Palihapitiya who plans to merge with loan startup Social Finance Inc. is a popular target, with 19% of its outstanding shares sold short, according to data from S&P Global Market Intelligence. The short interest in Churchill Capital Corp.,
a SPAC created by ex-investment banker Michael Klein who is merging with electric vehicle startup Lucid, more than doubled in March to about 5%.
Others are betting against companies after combining them with SPACs. Muddy Waters Capital LLC announced last week that it was betting against XL Fleet Corp.
, a fleet electrification company that went public in December after the merger with SPAC. Since then, XL said the Muddy Waters report, which claimed that XL inflated its sales pipeline and made misleading claims about its technology, among other issues, had “numerous inaccuracies”.
XL’s share price fell on the day Muddy Waters released its report by about 13%, to $ 13.86, from the previous close on March 2.
Lordstown Motors shares Corp.
it fell nearly 17% on Friday after Hindenburg Research released a report saying the electric truck startup deceived investors in its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. The stake sold in Lordstown shares rose from 3.4% to 5% in the week before the report was published, according to data from S&P.
“SPACs are an area of focus,” said Carson Block of Muddy Waters. The veteran short seller said that SPACs are largely the universe of companies that he sees as “abysmal” and relatively free from technical challenges, such as high short interest, which can make it difficult to place bets against them.
SPACs are shell companies that raise capital by issuing shares for the sole purpose of buying or merging with a private company to make them public. They are dominating the market for new equity issues, becoming a status symbol for celebrities while increasing the value of acquisitions, such as betting companies.
DraftKings Inc.,
in tens of billions of dollars.
Hedge funds that buy in SPACs in advance see them as a way to achieve high returns without much risk. Individual investors are attracted by the chance to gain positions in publicly traded companies that they could rarely acquire through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that “it is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it”.
A one-month high in stocks has recently lost momentum amid a broad sale of high-tech and tech companies. A SPAC stock index operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index fell about 7.3% in the same period.
“All of these stocks are momentum and many people want to sell them short,” said Matthew Tuttle, whose company Tuttle Tactical Management runs a publicly traded fund that allows investors to maintain a portfolio of SPAC shares. Mr. Tuttle is preparing to launch an ETF that bets against “de-SPAC” shares of companies that have merged with a SPAC – such as electric truck maker Nikola Corp.
and manufacturer of bakery products Hostess Brands Inc.
—And a separate fund that invests in stocks.
Private companies are switching to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and obtain a public listing. WSJ explains why some critics say that investing in these so-called blank check companies is not worth the risk. Illustration: Zoë Soriano / WSJ
Post-merger companies are particularly attractive for short selling because they have larger market capitalizations, making their shares easier to borrow, and because early investors in SPACs are eager to sell shares to guarantee profits, analysts and fund managers said.
Short sellers borrow shares they believe to be overvalued and sell them immediately, hoping to buy back the shares at a lower price when they need to be returned and pocket the difference. The strategy has proved dangerous in recent months, when individual investors have organized themselves on social media to boost stocks like GameStop Corp., forcing short sellers to buy stocks and limit their losses, helping to raise prices further.
Strong continued investor demand for SPACs could catch short sellers in a similar squeeze. The sale of SPACs can also be risky because their shares have a natural floor of $ 10, the price at which they can be redeemed before a merger, and because they are subject to sudden price fluctuations, analysts said.
Still, the share of short shares in SPACs and their acquisitions is rising.
A blank check company created by venture capitalist Chamath Palihapitiya who plans to merge with loan startup Social Finance Inc. is a popular target.
Photograph:
Brendan McDermid / Reuters
Some are betting against stocks that they believe have risen too fast, for unsustainable valuations. The price of the bioplastics company Danimer Scientific Inc.
it almost tripled to $ 64 in the first six weeks of the year after being purchased by an SPAC. The stake sold in Danimer shares rose from about 1% to 8.5% in January, and the share price fell to around $ 42, according to S&P data.
Others are placing bearish bets to protect themselves against potential losses in the SPAC shares they own.
Veteran short seller Eduardo Marques cited the SPACs and their increase in the number of shares listed in the United States as a short sale opportunity, according to a proposal for a stock selection hedge fund called Pertento that he plans to launch this year. America’s list of public companies has shrunk since the mid-1990s, but this trend has recently reversed, in part because of SPACs.
Its popularity helped spur new offers from Wall Street. Goldman Sachs Group Inc.
this year it started offering customers baskets of stock similar to overdraft, launching them as a way to protect exposure to SPAC, people who saw the offer said. Customers often customize the baskets that Goldman offers, which are themed and geared to the industry, such as bitcoin and electric vehicles.
Kerrisdale Capital founder Sahm Adrangi began shorting post-merger SPAC companies earlier than most, with a public bet in November against the shares of frozen food maker Tattooed Chef Inc.,
which is still traded above its price at that time. But stocks fell about 13% during the recent market crash.
“We saw these stocks go up a lot and now that people are lowering their risk, these high-flying SPACs are falling to the ground,” said Adrangi.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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