The Economist: How to short the bubbliest firms

Key topics:Shorting private firms is complex due to illiquid, opaque markets.Investors use listed proxies, bespoke contracts, and syndicated loans.Banks expanding private-credit trading may create new shorting opportunities..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.Viewers of “The Big Short”, a film released in 2015, based on a book by Michael Lewis, might remember the travails of investors who sought to short-sell American housing debt in the run-up to the collapse of Lehman Brothers. A growing number of investors now fear that America could be in for a jolt of a similar type, if not scale. And it could emerge, they think, from private markets and unlisted corners of the tech industry.Shorting the housing market may have been hard, but this presents another level of difficulty. A short position requires an investor to borrow an asset, sell it at its current price and hope it falls in value. If it does, the speculator can buy it at the new, reduced price, hand the asset back to the lender and pocket the difference—manoeuvres that are tricky in opaque and illiquid markets. To add to the challenge, banks have retreated from adventurous, synthetic offerings that once helped clients short firms and other assets, having been criticised when Lehman came tumbling down.Yet on Wall Street there is always a way. The first approach is an indiscriminate, spray-and-pray transaction. If short-sellers cannot get access to private corners of the market, they can at least short firms that finance them. Many private-credit and -equity providers, such as Apollo, Blackstone, Blue Owl and KKR, are listed. For an investor with perfect foresight, perhaps the easiest way to have shorted First Brands, an American car-parts firm that collapsed amid allegations of fraud in September, would have been to short Jefferies, an investment bank that was exposed to the company. Its shares dropped by 30% or so over the following four weeks. Similarly, some business-development companies, which invest in private debt, are listed publicly, even if their assets are not. Research by S3 Partners, a data firm, suggests that investors shorting BDCs made $124m in the year to October 21st. The S&P BDC index is down by 13% this year.The second method involves specific, bespoke arrangements. Benn Eifert of QVR Advisors, a quant outfit, offers an over-the-counter derivative transaction to those willing to take the other side of his bets against the buzziest tech firms. The contracts mean that if, say, OpenAI is listed in public markets or bought by another firm at a valuation above $300bn, he owes his counterparty money on a scale that rachets up according to the valuation. If its market value falls below $300bn, Mr Eifert is owed instead. Crucially, neither party needs to own OpenAI’s stock. Comparable options are available on prediction markets such as Polymarket.What the deals offer in simplicity, they lack in other areas. Mr Eifert’s contracts fall somewhere between a traditional short and a casual bet, ultimately relying on trust among the parties. They also mean that, if OpenAI or another firm were never to be sold or listed, the contracts would not trigger and neither party would be paid. Indeed, in the worst-case scenario for OpenAI—a total collapse—the contracts would not pay out.There is a third option. In theory, targeting the debt of smaller, private firms an investor believes to be heading for collapse is the most difficult approach. But insiders whisper of an alternative developed this year. The trade makes any private firm that has borrowed from banks in the syndicated-loan market a potential target. It follows the normal mechanics of a short position. A would-be short-seller agrees to sell a specific loan, which they do not currently own, to a bank that trades in the same chunk of debt. The bank and seller agree to a delay in the settlement of the trade—perhaps of three months—during which time the seller waits and hopes. If the loan rises in value, the seller must buy it at a higher price to sell on to the bank, losing money in the process. If the price plunges, the seller reaps the difference between the agreed price and the new bargain-basement price.This option is a cheeky workaround. Syndicated loans are not private credit; all the same, they do give short-sellers access to a far larger universe of private companies. Although the method has not yet been widely adopted, its simplicity might beguile investors who believe they have identified a fragile company before the rest of the world has. And as banks and other marketmaking firms attempt to increase the size of their private-credit trading capabilities, the market will become more liquid—opening up new opportunities for short-sellers. Increasingly, sceptics of private assets will have the chance to put money behind their opinions.

The Economist: How to short the bubbliest firms

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