'The Assassin' Fahmi Quadir on How to Survive as a Short-Seller

0:02 Bloomberg Audio Studios, Podcasts, Radio News.

0:18 Hello and welcome to another episode of the Audults podcast. I'm Tracy Alloway.

0:22 And I'm Jill.

0:23 Why isn't thal Joe? I have a soft spot for short sellers. I think what they do is sort of sometimes similar to journalism, right, You're trying to root out a particular story about a specific company and bring it to light, I guess, And I always wanted to talk to this particular short seller. She's kind of famous, yeah, in the space. I think she's one of the few short sellers maybe who's been in a Netflix documentary more than one, I think at the Yeah.

0:49 No, it's pretty like I totally agree with you about short sellers. I mean, I think, like when you look at the broad history of market so particularly you know, US markets over the last several decades, they basically go up, and there's a lot of money to be made by just like you know, betting on the line go up.

1:05 So I think you have to have like a sort of distinct personality type to think, oh, maybe there's some other interesting way to make money in this market. Socides betting on stocks going up, but it's an important service because one you know as they will say, and I think there's probably something to it. Shorting helps provide like price discovery, you can't just have everyone long. But then there's another layer that I think is very important, and this is the maybe connection to journalism. They often do a lot of work, right, They often have to do a lot of sort of what in very slightly adjacent field, what might be like considered investigative journalism.

1:41 And sometimes they get a lot of pushback as well, which you know if you if you go out and google this particular guest when it comes to a company like Wirecar, like famously she was being attacked on the streets in Manhattan and things like that. So just an incredible story and we're very lucky to have her on stage with us live at our show in London.

2:00 Yeah, that's right. And in addition to talking about the sort of the life of a short seller, what it's like being a short seller, we also sort of learned some new news, which is that she is getting interested in the Korean market.

2:13 Yeah, she's actually going long for the first time ever, and she's chosen Career, which is a very hot market at the moment to do that. So our guest is Fammi Kadeer. She is the founder and CIO of Safcat Capital. She also has a cool nickname, The Assassin.

2:28 Yeah.

2:29 Really the perfect person to speak to. Go ahead and take a listen. In that introduction, I didn't actually even say one of the coolest things about you, because there are a lot. But you are famous for going up against Valiant and Wirecard and.

2:43 Shorting those successfully.

2:45 And you are also known as the Assassin, which, as someone who has always yearned for a cool nickname, I'm very justealous cool.

2:53 Yeah, yeah, I guess ever since I got the nickname, So let you in on a little sea show.

3:00 I got that nickname before anyone knew who I was.

3:03 It was a way to basically assign my research, my products as it was being sent out to other short sellers and investors because I was an unknown entity. So another short seller who knew who I was just said, let's call her the Assassin. So it was sort of genderless, ageless, but it stuck.

3:21 Tell you what is how would you describe staffat Capital? What is the We'll get into the details, but big picture, what is your from?

3:28 Yeah?

3:28 So we launched in twenty eighteen, and we traditionally focused on high conviction shorting. So our fund exclusively shorts, and I really mean that we're only holding short positions.

3:42 We're not allowed by fund mandate.

3:44 To go directionally long in any way, not hedge in any way. So we need to be really down right on every position we take.

3:52 So what's client demand actually like at the moment, Because you know, we were talking about short sellers kind of becoming a dying breed if you think about so. Like Jim Chainos, who we've had on the show a number of times, he basically, you know, closed his fund, converted it into a family office because he said no one was interested in shorting the market anymore.

4:12 It's wild.

4:13 I've been in this business as a short seller now for about eleven years, and I've seen multiple cycles of short sellers coming and going, and I have to say it's never been an easy time. I think the institutional allocator community was interested in funding shorts.

4:29 Back after the GFC, so that was.

4:31 The point where you had the rise of larger short bias funds. But years of underperformance meant that these allocators lost interest. So by the time I was launching in twenty eighteen, there was really limited interests in funding shorts.

4:46 Investors believed in short alpha.

4:49 But the allocator community was really moving towards market neutral.

4:53 Strategies, so it was never easy.

4:56 And then as we head into twenty twenty one and everything with GameStop, the idea of having conviction short positions also became a huge risk. Even if you're a short seller who never touched game Stop or any of the mean stocks, an allocator doesn't care because they just see the risk associated with concentration on the short side. So we got to a point where basically it became there was no business case for running a short fund because no one was willing to pay you to do it.

5:24 And sadly, it's probably a tells us something about where we are in the market cycle.

5:30 So every day is a day about trying to evolve and stay in business.

5:35 So how are you still here?

5:37 Well, I think, by the skin of my teeth, it isn't easy.

5:42 I was fortunate enough to have picked investors who really gave me a lot of leeway to figure things out. But I would say since twenty twenty one, it's really been in existential crisis for me to understand, you know, what is the value of short selling and the Golden Age of fraud because the informational alpha we prove, the research that we do that has to affect price discovery because ultimately the role of a conviction short seller or any short seller for that matter, whether you're a systematic algo or a market maker, is to provide liquidity and support price discovery, right and conviction short sellers do that too, But the informational alpha components, it's just not affecting price discovery at this time the same way it has traditionally.

6:26 So short sellers have had to be essentially become factor investors like everyone else. We're chasing momentum and we're trying to find smaller windows of opportunity to make profit and de risk our positions.

6:39 We say more about the Golden Age of fraud because I mean, it feels like grift is everywhere right now, so you could in theory find a bunch of targets. But on the other hand, it also feels like everyone is willing to ignore grift because they just want to grab onto thementum and go along for the ride. What is the like target environment actually like for you?

7:04 The target environment is very rich, of course, but the way you're actually timing the trades is very different. Historically, you could build conviction a position and you could at least have some small exposure to that over time, and you know, trade into certain catalysts that you see. You can ensure that your your thesis is materializes in the.

7:28 Market some way. You could go to regulators and you could, you know, blow the whistle on some of these frauds.

7:34 But a lot of these levers that we traditionally had just don't exist anymore. Many of the contexts that I had are no longer in their old positions, so we we've had to go more and focus on fundamental catalysts, which was always an important part of shorting, but now it's a lot more and more than I necessarily like focusing on what will happen during earnings, really trying to find the early signs of fundamental deterioration. But ultimately you're waiting for the narrative to break and you're shorting.

8:07 On the way down, and it's always best you make.

8:10 The most money on the short when your thesis is materializing and momentum is in your favor, and you size into that. So as everyone is running for the exits, you are both shorting more and also covering your position. But as far as where we're shorting our target, we tend to focus on the consumer a lot. And I think everyone's so focused with AI and a big part of that is unemployment. But the consumer is stressed. Headline figures not necessarily compared to pre GFC, but if we look at household debt, you know, we're at eighty percent of income, but the more important numb figure that's growing is debt servicing, which is at eleven percent of income.

8:54 And if you look at households that have a significant student loan burden, that figure is.

8:58 Much much higher and it's growing.

9:01 And what we're seeing is sort of this bifurcation within households. So you have an older generation that's stabilizing, that's sort of this economic anchor, and then you have a younger generation that is stressed, that's facing greater unemployment and this just generational wealth gap. And we're really focused on where is this consumer struggling because I think, however we think about durable consumer cycles, that's all really going to change because of this bifurcation. So we're looking a lot into consumer a jacent businesses that have high funding needs. We really like levered roll ups, which are generally always good.

9:41 There's a lot of those in the US, so.

9:43 Levered rollups in the consumer discretionary space, but we're also looking a lot in healthcare healthcare services. I think for the mid long term, healthcare is going to be an important theme on the short side, because yes, this is the golden age of fraud, but it's also the age of populism. And the themes around reimbursement, cost of care, and the.

10:02 Systemic issues in the US healthcare system.

10:05 These are here to stay, and I think as we lead into the midterms and into the next presidential they're going to be important themes that we can invest on. For the past two years, I think investors have really gone full in to this sort of deregulation investment theme. But the reality with deregulation is that it's almost like what I like as a short Teil likes called willful blindness.

10:28 A lot of these businesses may look robust in this kind of environment, but those fundamentals depend on exploiting the consumer price gouging, and these are behaviors where you won't be able to continue and sustain those in a more populist political atmosphere, there's.

10:43 Great Do you distinguish between Okay, you talk about rising household debt levels, do you talk about these sort of fundamental drivers of reasons to think that businesses as will decline? Is that a category difference versus say, looking for companies that have something suspicious in their accounting, like, is that a fundamentally different type of trade. Here's a company where the fundamentals are turning. Here's another company in which the numbers just don't look right, and you think one day that people are gonna discover, then I'll go to zero.

11:17 I think there is definitely an alignment here, because fraud is never good for business, and taking advantage of your consumer is also never good for business. So these things do converge. You know, if you look at consumer finance, these stocks have done really well lately, but if you're actually looking at the underlying assets and what's being securitized, it's not looking as good and lost recognition is really lagging.

11:39 And again this goes.

11:40 Back to putting more pressure on an already stressed consumer. And a lot of these businesses that rely on price gouging and kind of taking advantage of a looser regulatory environment. They do so because they may have structural issues that they're already contending with. And the thing about businesses that are facing a structural decline, whether that's you know, circumstantial or something that's you know, fundamental and terminal, they will all turn to financial engineering because that's the only way they can try to mask the deterioration and the fundamentals of the business.

12:16 So I would say that the most the safest shorts.

12:18 In this environment or are companies where you have that sort of structural.

12:23 Break where the narrative is broken.

12:25 You know, the company may try to acquire new businesses and say they're you know, they're changing the story. But if the economics aren't following up and lining up with these acquisitions and you still see can you know, continue to see the fundamental deterioration, those are the shorts you can still even in this market sit in and ride ride down.

12:44 You know you mentioned uh levered private equity roll ups. Can you give us your thoughts on private credit in general, because we keep getting these sort of idiosyncratic blow ups, you know, the things that Jamie Diamond refers to as cockroaches, and they see idiosyncratic, but then they keep happening, and so it's kind of difficult not to ask the question about whether or not this is a more generalized issue.

13:07 Everyone loves to talk about private credit.

13:09 It's not necessarily a theme we look at because we are pretty idiosyncratic. So you know, we are looking at it where it touches some of the consumer facing businesses that are getting you know, credit from from these business from these lenders. But I think where I will Everyone likes to talk about the dot com mobile and you know the parallels to right now, but let's go further back to radio utilities and electrification and if we look at the structure of those utility companies, the holding structure and like, there were layers of financing at each level, and there was cash flows being recycled between each of these layers.

13:48 And the thing was it was an entirely black box. No one really knew what was going on.

13:53 And that's kind of how I see things unfolding today, especially with within AI and within the circular deals. You have a lot of money going around and what this is effectively doing because we don't see everything. It's manufacturing to some extent demand that demand.

14:11 Is driven by capital flows.

14:14 So I think an important catalyst for the market will be the open ai I p O whenever that may happen, an informational catalyst, because we'll see, you know, the financial narratives will be laid bare as.

14:27 A perspectus exactly, presumably a flow chart that kind of goes like.

14:31 This, we'll see exactly.

14:33 And and I think investors then will be forced to reckon with how they've priced some of this demand, and maybe that will be an important, you know, repricing moment for the market in general.

14:58 Maybe you know, a theoretical open ai IPO could be the top maybe you know who knows, et cetera. Can you be a professional short seller but not be sort of temperamentally bearished? Do people conflate bearishness with proclivity to short?

15:14 Yeah, because I think most short sellers I know are not bearish the market. And if you ever look at some of the things that short sellers go long, sometimes it's highly speculative, momentum driven stuff.

15:28 And many short sellers are again hedging their.

15:30 Shorts versus the market right and are net long, not net short. But for me, and I speak for myself, I don't speak for other short sellers. Short selling is about identifying things that are broken in the market. You mentioned, you know, golden age of fraud, age of grift. We don't necessarily have anyone looking for these breaks, for these things that are failings, for these misrepresentations.

15:56 We're all just so concerned with.

15:58 Chasing money and chasing profit that a lot of this gets thrown by the wayside, and short selling is the one way where we're kind of pushing back. It's pushing back against this you know, amoral drift towards you know, financial nihilism, whatever you want to call it. And right now, I would say short sellers are one of the only and one of the last arbiters of like market based corporate.

16:21 Governments feel like there's many rules these days.

16:24 There are rules, but whether rules enforced rules.

16:29 So the SEC, for example, enforcement activity enforcement actions for the SEC from twenty three to twenty four dropped I believe twenty six percent, and then the following year dropped another twenty two percent. So I want to say, you know, this isn't something that's tied to a single administration. It really is tied to procyclicality. Because no regulator wants to stand in the way of something as big as the AI boom, And it's always in the aftermath that we realize this.

16:58 What's your top tip for uncovering a short?

17:01 And the reason I asked this is because I remember there's a hedge fund manager who has never been on the show, but one can dream, but his whole his whole strategy, as he described it to me, he always said, follow the bad people.

17:14 Because if bad people show up.

17:15 At one company, assuming they don't go to jail, and a lot of them don't, they go on to the next company, and there's a tendency for things to go awry there as well. And so if you just follow those personalities from thing to thing to thing, you can spot a pattern there. What's your sort of I guess secret pattern sauce when it comes to finding these things.

17:37 If only it was simple as just one thing. Of course, following people matters, following money investor quality also matters who's funding this business In this market especially, you have to be.

17:49 Weary of the dependency on narratives.

17:52 Right there are healthy companies that are using narratives to explain their economics, but then there are dodgy and failing company that are using narratives to explain away their economics, so you have to be able to tell the difference. We tend to follow sectors where you have some sort of structural component that is going to put pressure on the business because that is really the test.

18:14 Of your management.

18:16 You know their governance and their ability to when they are dealing with pressure. Do they turn to fraud and financial engineering and potentially financial fraud accounting shenanigans, or are they transparent about their problems and they face the repricing themselves.

18:31 But I would.

18:32 Say what we really focus on, and this kind of goes along the lines of people in cases of terminal fraud, especially where you're going to have fraud at a systemic level, so it's going to go all the way up to the top. It's the people that are running that business that are somehow rotten. You need to understand how they think, and it's this behavioral component where you have to understand what the pressures on them are because many times that is not the stock Uh, there's going to be other exogenous factors that are worrying them when the house of cards is starting to fall in on them. And I'll use an example for your audience. You know, we're in London, so you guys all probably know about Wirecard. You know,

19:14 the headline of wirecard was always you know, with the Financial Times and the accounting fraud in the aftermath. We all know now that the co founder of wirecard was a Russian spy, and you know from from our research it was always about the money laundering and that basically the business was built around money laundering. So apart from what the Financial Times was doing on the accounting side with Wirecard Asia, we were looking at wire cards business in the US and this was a part of the market.

19:42 You know, no one really followed.

19:44 But the kingpin, the fixer as I'd like to call him, for Wirecard's business through the US with US dollars was this guy who was actually best friends with Jan Marsilick, the Russian spy co founder of wire Card.

19:57 So we presented information on him and.

20:01 It was I believe it was towards the end of March twenty twenty when we.

20:06 Were following you know, the docket every.

20:08 Day in the Southern District of New York and we saw finally there's a like in arrest warrant out for this guy who is the best friend of Jan Marslick, and this was something the market is not following. You know, while this is all happening, wire Cart is saying everything is all okay, wire Cart is putting out press statements saying that I don't I'm just not a good I'm not a good analyst. That's why I think it's money wandering.

20:34 But his best friend was arrested, and after that happened, there was a psychological collapse, you know. A few weeks later, it was John Marshallock's birthday party. He was chugging bottles of vodka, rolling around on the floor, not sure what to do with himself.

20:49 Bad sign, bad sign. And then within a month and a half two billion dollars missing, wire Card goes bust.

20:58 So it's about understanding what are these pressure points, what will actually make these guys sweat.

21:02 Let's pivot a little bit because you're also interested in deeply knowledgeable and investing in probably the world's most interesting and exciting stock market, which is Korea, which is interesting I think for two reasons. One because of the chips and we know they're making a ton of money from AI, but also just sort of changes in corporate governance and attitudes towards the stock market period? What should everyone know about how the Korean stock market works?

21:30 Yeah, so just to take it a step back, because you know, this is my first time going long so wait, this is big news.

21:40 You've never gone long before, long before? Yeah, but how are you going to join the party? But how should we think about this? Like is this capitulation?

21:50 Like does this say more about the short strategy than it does about the Korean market?

21:54 So that's that's what I want to say.

21:57 I wouldn't read too much into this as like the last short seller puts, you know, throws in the towel. That's not what this is, you know obviously, you know, thinking back to just the business landscape for short sellers and the funding environment for short sellers. It's really about thinking about my identity as a short seller and what do I want my legacy in the markets to be.

22:17 Yeah.

22:17 I love being the assassin, and there's you know, I have great pride in helping talk you know, bring up the discussion of drug pricing, bringing down a money laundering organization.

22:27 These things are important to me.

22:28 But you know, my skills have more utility than just that, And that's that was the starting point. You know, how do I use my skills in the golden age of fraud? You know, if I can't go and whistle blow on companies in the US and the West, then where can I go?

22:43 Who wants to.

22:44 See me use these skills? Who will value me? And for a long time, I'm a bit of a capital market's reform geek, especially when it refers like as far as like short selling regulations.

22:56 So I follow any.

22:57 Developments related to short selling, and I believe it's like November twenty three that Korea banned short sellings. So it's you know, alarm going off in my head and Korea is on my radar, so because whatever is happening there is going to be interesting, you know, good or bad. At that time, I was thinking it potentially as a place I would want to go short sometime. But then I started to learn more about Korea and what was happening there, and it's you know, we we've all been touched by Korean culture somehow, you know, Korean food, k pop, k drama, and Korea is such an interesting country to me because it's really developed its national identity after World War Two in the face of globalization. So as we've

23:42 seen the rise of globalization, we've seen the rise of Korea and we see it as this really sophisticated manufacturing based economy that exports a lot, but at the end of the day, technically it's still an emerging market, which is crazy. And if you look at the political history of Korea, most present sidence have been investigated, prosecuted, exiled.

24:05 The politics are very em coded exactly.

24:10 And you know that is crazy.

24:13 But at the same time, most chairmen of some sung have also been investigated, prosecuted, and sometimes jailed and sometimes pardoned. So there's this idea of accountability and a certain expectation that the Korean public has on its institutions. And this arises from a Korean value called chemian, which is face basically the face that you show to the world. And it's through this concept and through this lens.

24:39 I really started to understand the market very well.

24:42 I've spent you know, a lot of time there as as I'm looking to launch this new fund, we're looking to do long shareholder activism in Korea. But in the aftermath of this short selling ban, after the Democratic administration came into position, they've made a really concerted effort to fix a lot of the structural issues that we're holding Korea back, especially Korean markets. There's a big focus on deepening the FX market, stabilizing the one, encouraging domestic equity flows, and of course modernizing corporate governance. And it's on this last point where I feel like I can really add value and it's really exciting for me to be a part of the transformation there.

25:29 Wait, so give us an example of what improving corporate governance in Korea would look like. How do you you know, we're talking about it in the same language as going short, but maybe that stands up your point, like how do you identify a target and what you can actually do here.

25:45 I want to first say that stock price has not been the guiding factor of Korean companies. You know, I mentioned these utilities holding companies before that was back in the nineteen twenties in the US, before these pablishment of the SEC.

26:01 Well, Korean companies have looked like that through most of the modern era.

26:07 And it was only this past year, not even a full year ago, that Korea enshrined the rights of shareholders into their corporate code. So companies now have a fiduciary duty to shareholders to provide fair and equitable treatment. So there's now this idea of chmyun now applies to stock price, and that is going to change a lot of the behavior of how companies act and how these holding companies and these families that run them.

26:38 The troubles, how they act.

26:41 Korea has been dominated by these troubles, and one of the main things that they've been trying to avoid is inheritance tax. So a lot of the governance issues have been related to different structure transactions they would do to depress the value of the assets in order to minimize their inheritance tax burden. But now they realize they can't do this.

27:02 It's like a fraud in the other direction, kind of exactly exactly.

27:07 So it's a fraud to make things cheaper, not more expensive.

27:10 And that's really interesting for me because I have an expertise in fraud and I can actually unlock that discount that value.

27:19 From these businesses.

27:21 But the other interesting dynamic with these troubles is that they're now either entering or exiting their third succession, So you have a new generation of owners that are much more globally oriented. They're looking at what's happening in US markets. They're much more capital where they start seeing the prestige behind having a big stock a high stock price, so they're much more willing to engage. So the companies that I'm looking at in Korea are not the ones that are the high flyers. I'm not looking at Samsung and Skhex, I think they know what they're doing. I'm looking at the businesses that don't have as much experience with foreign markets, that have sort of been bogged down by these corporate

28:05 structures over the past couple of years, and this new generation doesn't really know how to rid.

28:10 Themselves of that history.

28:13 Because the thing about the Korean investing public is they're very passionate, and traditionally these Korean retail investors have stayed away from Korean equities because of the bad experience holding these trouble companies that have these depressed value. But now actually the financial regulator just announced recently that if you are a company on the costp where you're trading below book value, you will be named and shamed. So that will be a great place to start finding.

28:42 Targets kind of punished companies for being too cheap, So you're talking about this generational change? Is it true what they say about Korean retail traders. They have a reputation for they really like to place bets. That's what people talk about online. Is that true about the trading public in Korea?

29:02 Yes.

29:02 So I've been fortunate enough to spend a lot of time with retail investors there, and you definitely do have a younger generation of retail investors that's very digitally connected, and they are certainly trading trade their trading name stocks. They're proud to have their triple averty TF seeing stock ETFs.

29:20 This is what the reputation.

29:21 Yeah, so they're.

29:22 They're there, they're noisy, but they're not the largest part of the retail public. The largest part are you know, traditional value investors who've really tried to build generational wealth through their their their accounts, and they've stayed away from Korean equities again because of what they viewed as value destruction, and suddenly now because of the incentives and because of these structural changes that are happening, those investors are now starting to buy into Korean equities.

29:51 All Right, Fami, thank you so much for coming on all thoughts and explaining your new strategy. It sounds fascinating and we appreciate it. Thank you so much, Thank you. That was our conversation, recorded live in London on May seventh.

30:17 All right, shall we leave it there.

30:18 Let's leave it there.

30:19 This has been another episode at the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.

30:24 I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carmen Arman, dash Ol Bennett at Dashbot, Calebrooks at Klebrooks and Kevin Lozano at Kevin Lloyd Lozano and form our Odd Lots content. Go to Bloomberg dot com flash odd Lots. We have a daily newsletter and all of our episodes. You could chat about all of these topics twenty four to seven in our discord Discord dot gg slash odd Lots.

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31:08 Thanks for listening.