Why Are Shorts Circling Fellow Short Sellers?

It may be that on Wall Street there’s no honor among short sellers. Or maybe it’s just that profits are to be taken wherever they can be found.

In a Bloomberg article published on Wednesday (Dec. 16), investors who smell blood in the water are setting their sights on Greenlight Capital Re Ltd., a reinsurer founded by famed hedge fund manager David Einhorn. Short interest on Greenlight is at more than 5 percent, as tabulated by data released on Tuesday.

Einhorn is in illustrious company, as the shorts (as they are commonly referred to through shorthand (pun intended) on the Street) have also boosted positions in Dan Loeb’s own reinsurance vehicle, known as Third Point Reinsurance Ltd., with the short interest there standing at 3 percent, up from a mere 6o basis points nearly two years ago.

What does this mean in layman’s terms? It’s kind of through the looking glass in a way, as the shorts shorting a short seller implies, well, that the shorts doing the active shorting are actually bulls in bearish clothing. That’s one way to look at it. But a closer examination, of course, reveals that the reinsurance arms of these funds are, in fact, typical vehicles that seek to make money on assets, while controlling for risk, and thus eke out net income. Both money managers built the reinsurance agents and then took them public, and for the short sellers, the bet has worked, as shares have declined even as short positions have mounted, indicating that they believe, like some Bizarro Frank Sinatra lyric, that the worst is yet to come.

In an interview with the newswire, Ken Billingsley, an analyst with Compass Point Research & Trading, noted that the fundamentals of the reinsurance businesses across both hedge fund titans has shown “a double whammy. You’re losing money on the assets-and-investing side of the portfolio. You’re losing money on the risk-taking, the insurance side of the business. It’s obviously not conducive to generating good returns for shareholders.” It remains to be seen how rising rates, which saw the first shot over the bow, may tip the balance on margins, though conventional wisdom holds that premiums and returns on holdings should rise (and that would be, eventually, tough on short sellers).

So far, the tough environment bedeviling reinsurers has been reflected in the share price, for example, of Greenlight Re, which trades at $18 and has seen shares slide by roughly half in 2015. That is also a busted IPO from the $19 a share offer eight years ago.

Relatively tame by comparison is the 6 percent drop in the reinsurer run by Loeb, though the stock saw a dismal 2014, down by 22 percent in 2014. Third quarter losses in the most recent period stood at nearly $196 million, a huge jump from a year ago at $6 million. The Third Point business has been slammed by declines in some of its biggest holdings, such as Yum! Brands, which owns and operates Pizza Hut and other iconic fast food brands.