Sunday, 23 September 2012

Bronte Capital’s short waves

Interesting interview of the two founders of Bronte Capital by Jonathan Shapiro.

Some excerpts:

Bronte Capital sprouted from Hempton’s investment blog, which attracted a cult following around the world after he began posting in early 2008 at the height of the financial crisis. As the financial system headed for destruction, Hempton’s posts included the prediction of a Baltic banking crisis by measuring the collapsing cost of hookers in Estonia, and nominating RBS banking head Sir Fred Goodwin as worst-ever banking CEO. Among the first financial experts to embrace the blogosphere, fans of his sharp, detailed and accessible stock analysis grew. His admirers and pen pals include some of Wall Street’s brightest, hotshot hedge funds and a number of Silicon Valley luminaries.

The forensics of finding shorts is part art, part science. But since fraud is human, it helps to follow the people. Hempton pays very close attention to public relations agencies, stockbrokers, and, most of all, lawyers of companies he knows to be fraudulent, as these handmaidens to sharemarket fraud leave a trail. “Lawyers are our favourite scumbags,” he says. “They sign their name on everything and they never get prosecuted.”

Plenty of other methods remain distinctly proprietary. But one that Maher was prepared to share is to sift through the divorce filings of American executives. These can reveal undisclosed related-party transactions, resulting in different stock holdings than what is reported publicly. “You may be able to hide from the SEC [US Securities and Exchange Commission], but an acrimonious wife with her own legal team is a different matter entirely,” Maher comments dryly.

Bronte has a strong track record picking Chinese frauds on global exchanges in sectors including cement, travel, medical products and education. By its estimates, it has successfully shorted more than 40 Chinese stocks. “We really do have a hard time finding one that is honest, and we sincerely want to so we can hedge our short positions. There are a lot of good things going on in China. But the good things just don’t get shown to Western investors.”

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