The Short-Sellers’ Ball: Not Everyone Cried on Freaky Friday

In the midst of the massive stock market collapse on the afternoon of Friday, April 14, Brian Rogers, a 36-year-old hedge fund manager, stepped outside the small office he shares with his partner, Adam Weiss, at 230 Park Avenue, and encountered the walking dead.

Two-thirty Park is one of those buildings that swarm with hedge fund managers-a latter-day version of the old writers’ bungalows on the studio lot. In the hallway that day, as the major indices plummeted, money managers milled about, looking stunned. They were getting shellacked. And seeing Mr. Rogers away from his turret, they assumed he was, too.

But he was having one of the best days of his life.

“They want a shoulder to cry on, and I really don’t know what to say,” Mr. Rogers said.

Mr. Rogers manages the Short Alpha Bear fund, a pool of more than $10 million with which he places bets against stocks he thinks are going down. Mr. Rogers is a short-seller. He borrows stock he thinks is headed for a fall, then sells the stock and waits for the decline. Then he buys back the stock at a lower price, repays the loan and profits from the difference.

Last year, this approach did not serve Mr. Rogers very well. As the Nasdaq skyrocketed and seemingly silly stocks turned into big winners, his skeptical approach to the market failed him, as it did so many others. Last year, his fund lost 38 percent of its value.

But in recent weeks, and especially on Friday, he has cleaned up. As of the evening of April 14, his fund was up 52 percent on the month, he said-this after reporting a first-quarter gain of 25 percent.

Mr. Rogers is not alone, but he is pretty close. The stunning gains in the Nasdaq in 1999 and the first two months of this year weeded out all but the most nimble and well-capitalized market skeptics.

“There aren’t very many short-sellers left,” said Barry Colvin, a director of research at Tremont Advisers, a hedge fund consultant. They either went out of business or changed their strategy to get with the times. By the time Black Friday capped weeks of mayhem on the Nasdaq, there were few left who could really enjoy it.

But there were a few, and what fun they had, savoring that rare chance to snicker at the New Economy evangelists. The annoying cocktail-party gloaters suddenly found themselves deluged with margin calls and tax bills. Pain, shmain. For the bears, it was sweet! Even if the short-sellers’ moment of vindication was fleeting-the markets rebounded sharply on April 17 and on the morning of April 18-it gave them a taste of what life could be like if the market were to revert to its pre-Internet ways-rational, plodding and rewarding to those with an intellectual cast of mind.

“I have a friend on the West Coast,” said one hedge fund manager who has been punished in the last year and a half for his skeptical outlook. “He has blown himself up. He has his own account. He’s playing all these hot stocks. He doesn’t have a clue. He personifies a lot of the hubris and strutting. He made a mint. He’s a good-looking guy, a good tennis player, good at chasing pussy, but not a guy I’d give my money to. He’s been goading me for a year and a half. Now I hear he’s been closed out.” This made the manager happy.

Misery, Meet Misery

In the hallway on Friday, Mr. Rogers had to resist the urge to gloat.

“I don’t enjoy watching other people suffer,” Mr. Rogers said after the close of the market on April 17. He was sitting with Mr. Weiss in their small office, under a horizontal poster of the Manhattan skyline at twilight. He was wearing khakis and a blue button-down shirt. He had a goatee. “But at the same time, I’ve always thought it was important to follow my own logic with the market, the way I see it. Granted, if we do well, it might be at the expense of others, but it works both ways. It’s not like I can control it.”

A little smirk crept across his lips.

“When we do well, it usually means about 95 percent of the guys out there are doing really poorly,” Mr. Weiss said. “So we’re always in the minority, whether we’re doing well or not. When other hedge fund managers are getting their butts kicked, like they did last week, they want some company. Misery loves company. So we just have to keep our smiles to ourselves.”

“Of course, some people are saying, ‘Wait! The market’s going back up!’” Mr. Rogers said. “But I think by the end of the week it will be clear that the thing has changed. In my opinion, we’re no longer in a bull market. A 20-year event just changed. Wall Street is trying to show confidence in the face of a difficult battle. But I don’t think anyone’s going to believe it.”

Short Alpha is a rare breed: 100 percent short. Mr. Rogers has been investing using the Short Alpha model since 1997. His first year, he returned 43 percent. In 1998 he soared to 118 percent, but last year he was down 38 percent. Rich people won’t let you lose their money for too long before they take it away. Just look at what happened to Julian Robertson, the hedge fund master whose adherence to the recently outmoded principles of value investing caused him to lag way behind the market. He closed his Tiger funds in March. His timing was unfortunate. For the first time in years, the market looks like it may begin acting like the market Mr. Robertson grew up with.

“The bulls in this market did not believe that we would get to the type of sell-off period that happened on Friday and that’s happening right now,” Mr. Rogers said. “The volatility was an unexpected event, something they said couldn’t happen. Some of these stocks are down 50 and 70 percent, and that wasn’t the plan. At every opportunity, I had been telling people that I disagree, that there would be a big sell-off. So, yeah, I think there’s some vindication here.”

The sound of that vindication was the chorus of short-sellers singing out all over the Street.

“I don’t hope the market goes down,” said Christopher Norwood, president of Thunderbird Management Inc. His fund is up almost 20 percent to date this year and over 13.5 percent in March. “But I have found myself putting on shorts, and I hope I’m right. I hope this part of the market does struggle, because you’ve made a decision, you’ve made a bet, and you can’t help but root for it.”

“Shorting sometimes gets a bad name,” said David Tice, the manager of the Prudent Bear Fund, which is up 17 percent for the year. “But the bad guys are the guys who have been touting these stocks at such ridiculous values over the past few years.”

One money manager said, “The only change that occurred last week was a change in perception, because the people who manage money in this country, and the people who invest, are by and large sheep. The question is not, Why did the market go down; it’s, Why was everyone buying things they knew were overvalued? It’s like seeing a suit on sale at Saks and waiting until it’s back at full price before you buy it. That’s momentum investing. Momentum investing has nothing to fucking do with investing.”

“I guess there’s a tiny bit of vindication,” Mr. Tice said. “We think we’ve only just begun. The Nasdaq is only around November levels, so it hasn’t even moved very far yet. I’m trying to caution investors against getting burned. I have a calm, caring attitude-I’m not really looking forward to a continued downturn.

“If there’s a bear market, we think we’ll do very well,” Mr. Tice continued. “I hate to see people get hurt, but the fact is this mania is destructive to the country. You’ve got to pay the piper sooner or later. So I think we need to get this over with. It’s like giving a 15-year-old kid two hookers, some cocaine and a couple bottles of tequila. He’ll have a great time for a while, but he’ll be a basket case by the time he’s 18.”

The question is, are we 18 yet? “There was that rehearsal, April 4: The market was down big,” said one long-suffering bear. “Guys were buying the dip. Hey, guess what? For the first time, the guys that did that got their asses handed to them. It was the first time in a long time that buying the dip wasn’t rewarded a few weeks later.”

As the bear said this, though, the Nasdaq and, in particular, the Internet sector, were in the midst of rebounding strongly for the second straight day. It was beginning to look like he might be wrong. Again.