Why this former Kingsford analyst is launching an activist short fund, the Woes Be Damned short sale
The myriad of issues surrounding short sellers – including a surprising increase in the number of lawsuits against them – doesn’t deter a young upstart from getting into the business.
Chris Drose, former analyst at short-biased hedge fund Kingsford Capital, is launching a new short activist fund called Bleecker Street Capital this summer, he said in an interview with Institutional investor.
Drose rose to fame in 2014 when, while a student at Furman University, he began to uncover a huge scandal in the American Addiction Centers – a scandal that led to second degree murder charges. Although the charges were later dropped, the company eventually filed for bankruptcy and Drose’s work led to an internship at San Francisco-based Kingsford Capital years before he was hired as an analyst in January 2019.
The scandal surrounding the for-profit drug center, including Drose’s involvement, was reported on speak New York Times in 2017.
However, in 2016, the young short seller apologized for the mistakes he made in a short report he published on Seeking Alpha under the auspices of a company he founded, Bleecker Street Research.
After posting a short report on ChromaDex, which also targeted stock promoter Barry Honig and Pershing Gold, he quickly retracted it.
“Upon further research, we believe the claims were unsubstantiated and the premise of the article would have been factually inaccurate. Bleecker Street would like to apologize to ChromaDex, Pershing Gold and Barry Honig for an allegedly misleading article and Immediately set the record straight for our readers who should not trust some aspect of the withdrawn article or the author’s statements therein, ”he wrote.
Even with the mea culpa, Honig – who last year installed with the Securities and Exchange Commission on fraud charges in a separate case – sued the young short seller, leading to an undisclosed settlement.
Last week, another activist short seller, David Quinton Matthews of QKM, wrote a similar apology to Farmland Partners, as reported II.
Short sellers fear that Farmland’s success will embolden other high net worth companies and their lawyers to target more short sellers. In the past 18 months, at least four new lawsuits against activist short sellers have been filed.
“If you write short reports, you better be prepared to litigate,” said one short seller. But some small, short-term activist businesses just don’t have the money to fund expensive litigation, and law firms are suing them, he added.
None of this seems to deter Drose, who won’t have much money to get started. He said he had $ 10 million in verbal commitments so far.
But Drose said his previous litigation experience had prepared him “100%” for what to come.
“I won’t comment on past litigation, but I still think you’re better at something the second time around,” he said. II.
Further, he argued that short selling “is not something that is going to go away. There is alpha and there are profits to be made.
In taking the activist route, Drose takes a different approach from Kingsford, who keeps short stocks low, but is known to provide his research to exposed activists.
Drose thinks activism is a better strategy. “If you write a little book and sit there, you’re basically a sitting duck,” he said. He noted that several non-activist short funds – such as Kingsford, Sophos Capital Management and Safkhet Capital – have all had rough times.
In contrast, “this year has been a fantastic year for activist short selling,” he said.
“There are always things that work,” Drose added, pointing to the strong performance of many activist plays this year, especially among EV companies and Special Purpose Acquisition Companies, or PSPCs.
He plans to pitch his second short idea since leaving Kingsford on Wednesday, and he said it focuses on a PSPC.
At Kingsford, Drose said he manages a portion of the shorts-focused assets of companies between $ 2 billion and $ 3 billion in market cap.
He said Bleecker will be less diverse than Kingsford, holding between 20 and 30 shorts. Unlike some short-lived activists, he will not focus solely on fraud, he added.
Drose worked at Kingsford for just over two years before leaving earlier this year. Prior to that, he was an analyst at Steamboat Capital Partners, which he joined just after writing the ill-fated research report on ChromaDex.
He is convinced that now is the right time to start a hedge fund focused on short selling. “It’s a bit like launching a long-biased fund in March 2009,” he said, pointing to the bottom of the bear market after the 2008 financial crisis.