Muddy Waters Capital CEO Carson Block suspects that flimsy companies' bets on artificial intelligence won't work out in the long run. By Bill Alpert

A lot has changed since Carson Block helped create the strategy of short activism 15 years ago. Publishing exposés on stocks that he is betting against has gotten tougher -- and not just because of a buoyant stock market.

"It is a very hard business," says the 49-year-old CEO of Muddy Waters Capital. Companies are quick to sue short-seller critics. Investors seem less worried about a business' risks. Stocks with rising momentum run over shorts like freight trains, no matter what an activist's report says.

Block gained celebrity not just by betting against stocks -- like most hedge funds do -- but also by publishing his critiques on the internet. Canada-listed timber firm Sino-Forest fell 89% when a 2011 Muddy Waters report alleged that its assets and earnings were overstated. After the company filed for bankruptcy, Canadian regulators agreed it had been a fraud.

Others got into the game -- most notably Nate Anderson, whose Hindenburg Research earned fame and profit with smackdowns on electric-truck promoter Nikola and investor Carl Icahn's Icahn Enterprises.

While still a niche in the hedge fund industry, activist firms gained appeal for some endowments, family offices, and wealthy individuals. An activist typically researches just a handful of 100-page short reports in a year. It will put a short position on a stock a few days before publication, then unwind it a day or two later.

Muddy Waters alters that approach, holding some positions for longer periods. It can also trade more frequently, by funding the ideas of smaller activist firms and making short bets on their research as well as its own research.

Short activism has been an unrelenting grind in recent years. Hindenburg's Anderson retired from short activism last year, saying he wanted to spend more time with his family. Most wannabe activists have been chewed up and spit out by the rising market, which has imposed losses on many short sellers.

But Block and other skilled activists still make money.

"We've had to be really selective this year in light of a punishing tape, " says Soren Aandahl, whose Blue Orca Capital made successful bearish calls on Baldwin Insurance and Teladoc Health in 2025.

Investors have become desensitized to risk as the 2008-09 financial crisis fades from memory, Block believes. Government bailouts let shoddy companies survive their mistakes. And the bar has gotten higher for the kind of revelations that will alarm investors.

And an increasing portion of investors just don't care. Index funds will never sell a component of their benchmark. Retail traders will band together on social media to pump up meme stocks and squeeze short sellers, as some hedge funds learned in January 2021 with GameStop.

Despite that year's awful beginning, 2021 became a good year for activist shorts. The bubble popped in meme stocks and special-purpose acquisition companies. "I was thinking, hey, a lot of these retail speculators have been taught some hard lessons," Block recounts. "They're not going to do that again. Ha ha ha ha."

Since then, the Nasdaq Composite has more than doubled. Muddy Waters' returns have held in the low-double digits, and assets under management have grown to $350 million.

Block has changed his tactics. Now, when sizing up a stock for an activist campaign, Block avoids those held primarily by retail traders or whose top shareholders are index funds. "We're just a lot more attuned to technical factors than we used to be," he says, "looking for the right mix of retail and institutional, thinking about timing, thinking about momentum."

Activists have also had to contend with suspicious market regulators. The U.S. Securities and Exchange Commission had taken many enforcement leads from the activists' work. But in October 2021, complaints from some companies and law professors got government investigators to raid prominent activists. Block says that Muddy Waters spent millions defending itself during the investigation, which was ultimately dropped.

"Up until the moment when they showed up at my door, I'd say that my mentality was 50% mission driven, 50% commercial," says Block. "Mission driven being: 'We're exposing bad actors, cleaning up the market, and adding transparency.' Something broke inside of me that morning when those guys showed up."

Short activist Andrew Left is still fighting federal civil and criminal cases, which allege that his reports were insincere because he got out of certain short positions at prices that weren't those his reports listed as the fair value. Left says his reports are truthful, and that he has done nothing wrong. He notes that money managers recommending a long position on television or in a financial publication aren't expected to always hold out for their target price.

History's wheel may be crushing the shorts, but Muddy Waters is still preparing for the next turn. One sector under watch are the companies claiming they will use artificial intelligence to replace their core service or product.

"Now is a good time to develop your inventory of these names, but it's a bad time to execute on those names," says Block.

There will come a time, however, when the supply of speculative, junk AI names exceeds demand. "That's the time that I think people in my industry will be pretty prolific in exposing the real grifts and scams out there," he says.

Write to Bill Alpert at william.alpert@barrons.com

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October 17, 2025 21:30 ET (01:30 GMT)

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