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

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2:29Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracey Alloway.

2:33Tracy Alloway:And I'm Joe Weisenthal. Joe, I have a soft spot for short sellers. I think what they do is sort of sometimes I'm 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 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 this point. 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 markets or particularly, you know, U.S.

3:09Tracy Alloway: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. So I think you have to have like a sort of distinct personality type to think, oh, maybe there is some other interesting way to make money in this market besides 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.

3:42Tracy Alloway:They often do a lot of work, right? They often have to do a lot of sort of what in a very slightly adjacent field, what might be like considered investigative journalism. 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 Wirecard, like famously, she was being attacked on the streets of 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. 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.

4:24Yeah, she's actually going long for the first time ever. And she's chosen Korea, which is a very hot market at the moment to do that. So our guest is Fahmi Kadir. She is the founder and CIO of Safcat Capital. She also has a cool nickname, The Assassin. 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 shorting those successfully. And you are also known as the Assassin, which as someone who has always yearned for a cool nickname, I'm very jealous of.

5:04That's so cool. Yeah. Yeah, I guess ever since I got the nickname, so I'll let you in on a little secret. Sure. I got that nickname before anyone knew who I was. It was a way to basically assign my research, my product, 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.

5:32Tracy Alloway:Tell me, how would you describe Safgut Capital? What is the, we'll get into the details, but big picture, what is your firm? Yeah, so we launched in 2018 and we traditionally focused on high conviction shorting. So our fund exclusively shorts. And I really mean that. We are only holding short positions. We're not allowed by fund mandate to go directionally long in any way, not hedge in any way. So we need to be really damn right on every position we take. 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 someone like Jim Chanos, 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.

6:23It's wild. I've been in this business as a short seller now for about 11 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 back after the GFC. So that was the point where you had the rise of larger short biased funds, but years of underperformance meant that these allocators lost interest. So by the time I was launching in 2018, there was really limited interest in funding shorts. Investors believed in short alpha, but the allocator community was really moving towards market neutral strategies.

7:05So it was never easy. And then as we head into 2021 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 GameStop 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. And sadly, it's probably a, it tells us something about where we are in the market cycle. So every day is a day about trying to evolve and stay in business.

7:46Tracy Alloway:So how are you still here? Well, I think by the skin of my teeth. It isn't easy. 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 2021, it's really been an existential crisis for me to understand, you know, what is the value of short selling in the golden age of fraud? Because the informational alpha we provide, 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?

8:27And 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. So short sellers have had to 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. Wait, 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 the momentum and go along for the ride.

9:11What is the target environment actually like for you? 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 and position and you could at least have some small exposure to that over time and trade into certain catalysts that you see. You can ensure that your thesis materializes in the market some way. You could go to regulators and you could blow the whistle on some of these broads. But a lot of these levers that we traditionally had just don't exist anymore. Many of the contacts that I had are no longer in their old positions.

9:55So 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 on the way down. And it's always best, you make 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.

10:33But 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. You know, headline figures not necessarily compared to, you know, pre-GFC, but if we look at household debt, you know, we're at 80 % of income, but the more important figure that's growing is that servicing, which is at 11 % of income. And if you look at households that have a significant student loan burden. That figure is much, much higher and it's growing. And what we're seeing is sort of this bifurcation within households.

11:15So 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 adjacent businesses that have high funding needs. We really like levered roll-ups, which are generally always good. There's a lot of those in the U.S. So levered roll-ups in the consumer discretionary space, but we're also looking a lot in healthcare, healthcare services.

12:00I think for the mid-long term, healthcare is going to be an important theme on the short side because yes, it's the golden age of fraud, but it's also the age of populism. And the themes around reimbursement, cost of care, and the systemic issues in the U.S. healthcare system, these are here to stay. And I think as we lead into the midterms and into the next presidential, they're gonna 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 seller like to call willful blindness.

12:39A 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 know, you won't be able to continue and sustain those in a more populist political atmosphere.

12:54Tracy Alloway:This is great. Do you distinguish between, OK, you talk about rising household debt levels. You talk about these sort of fundamental drivers of reasons to think that businesses 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 is a company where the fundamentals are turning. Here is another company in which the numbers just don't look right. And you think that one day people are going to discover that and it'll go to zero. 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.

13:35So 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 loss recognition is really lagging. And again, this goes 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.

14:26So I would say the safest shorts in this environment are companies where you have that sort of structural break, where the narrative is broken. The company may try to acquire new businesses and say they're changing the story. But if the economics aren't following up and lining up with these acquisitions and you still continue to see the fundamental deterioration, those are the shorts you can still, even in this market, sit in and ride down. You know, you mentioned 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 Dimon refers to as cockroaches.

15:09And they seem 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. Everyone loves to talk about private credit. 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 credit from these lenders. But I think where I will, everyone likes to talk about the dot-com bubble and, you know, the parallels to right now. But let's go further back to radio, utilities, and electrification.

15:46And 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. And the thing was, it was an entirely black box. No one really knew what was going on. 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 is driven by capital flows. So I think an important catalyst for the market will be the OpenAI IPO, whenever that may happen, an informational catalyst, because we'll see, you know, the financial narratives will be laid bare.

16:37You'll get the prospectus. Exactly. Presumably a flow chart that kind of goes like this. We'll see. Exactly. 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 repricing moment for the market in general.

17:08Tracy Alloway:Data centers need electricity. AI needs copper. Reshoring needs steel. And Gold's Run may tell you something about how the world is repricing money and debt. All of those point back to real assets. The RACS ETF is an actively managed one-stop real asset shop from gold to commodities to natural resource equities, adjusting as conditions change. Visit VanEck.com slash RAAX pod to learn more. An investor should consider the investment objective risks, charges, and expenses of the fund before investing. To obtain a prospectus and summary prospectus, which contains this and other information, visit VanEck.com.

17:46Tracy Alloway:Please read the prospectus and summary prospectus carefully before investing. Rax is distributed by VanEck Securities Corporation Distributor. Running a small business takes everything you've got. But with Chase for Business, you're not alone. They bring together local support and a broad range of resources to more than 7 million customers. With a deep understanding of your day-to-day needs, they provide products and guidance built to help you thrive. Right now, earn$500 when you open a new Chase Business Complete Checking account for new business checking customers with qualifying activities.

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18:54If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati Insurance Companies. Let them make your bad day better. Find an agent at CINFIN.com.

19:30Tracy Alloway: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 bearish? Do people conflate bearishness with proclivity to short? 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. And many short sellers are, again, hedging their 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.

20:12Short 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. We're all just so concerned with 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 amoral drift towards 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 market-based corporate government.

20:53Tracy Alloway:I feel like there's many rules these days. There are rules, but whether... Oh, enforced rules. Enforced rules. So the SEC, for example, enforcement activity, enforcement actions for the SEC from 23 to 24 dropped, I believe, 26%. And then the following year dropped another 22%. So I want to say, you know, this isn't something that's tied to a single administration. it really is tied to pro-cyclicality 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. What's your top tip for uncovering a short? And the reason I ask this is because I remember there's a hedge fund manager who has never been on the show, but one can dream.

21:39But his whole strategy, as he described it to me, he always said, follow the bad people. Because if bad people show up 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? If only it was simple as just one thing. Of course, following people matters. Following money, investor quality also matters.

22:16Who's funding this business? In this market especially, you have to be weary of the dependency on narratives, right? There are healthy companies that are using narratives to explain their economics, but then there are dodgy and failing companies 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 of your management, 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 do they, are they transparent about their problems and they face the repricing themselves?

23:03But I would 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. There's going to be other exogenous factors that are worrying them when the house of cards is starting to fall in on them.

23:39And I'll use an example for your audience. You know, we're in London, so you guys all probably know about Wirecard. You know, 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 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 Wirecard's business in the U.S. And this was a part of the market, you know, no one really followed.

24:15But the kingpin, the fixer, as I'd like to call him, for Wirecard's business through the U.S. with U.S. dollars was this guy who was actually best friends with Jan Marsalik, the Russian spy co-founder of Wirecard. So we presented information on him. And I believe it was towards the end of March 2020 when we were following the docket every day in the Southern District of New York. And we saw finally there's an arrest warrant out for this guy who is the best friend of Jan Marsalek. And this was something the market is not following. While this is all happening, Wirecard is saying everything is all OK.

24:58Wirecard is putting out press statements saying that I'm not a good analyst. That's why I think it's money laundering. But his best friend was arrested. And after that happened, there was a psychological collapse. A few weeks later, it was Jan Marslik's birthday party. He was chugging bottles of vodka, rolling around on the floor, not sure what to do with himself. Bad sign. Bad sign. And then within a month and a half,$2 billion missing, wire card goes bust. So it's about understanding what are these pressure points? What will actually make these guys sweat?

25:34Tracy Alloway:Let's pivot a little bit because you're also interested and deeply knowledgeable in 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? Yeah, so just to take it a step back, because this is my first time going long. So, wait, no, this is big news. Yeah, this is big news.