In 2010, Mark Hiley founded The Analyst, an independent research house for institutional clients that’s best known for its “sell” recommendations on stocks including Wirecard, Carillion and NMC Health.
The interview transcript has been edited for clarity, not brevity.
So Mark, what led you to do what you do?
I joined Fidelity in 2001 straight out of university, and I’d always loved stock picking. There was a share trading club at university during the tech bubble, so we were punting around in hot tech stocks and we all lost 99 per cent of our money, but it was fun learning about the market. So I applied to Fidelity, got a job there as an analyst. Loved it. Loved the intellectual challenge of learning about new companies every day.
Then in 2004 I jumped from Fidelity to a hedge fund and, by judgment or bad luck, became a shorting guy. I’d always been interested in accounts. I’m not an accountant, but I’d enjoyed modelling companies on spreadsheets and picking apart accounts. So I ended up doing a lot of shorts, with some success. Then a lot of success.
In 2008, when everything collapsed, the fund shrank, and I went travelling. When I came back, I wasn’t really in a position to launch my own fund. I didn’t have a track record, didn’t particularly want to go and work for anyone. So I had the idea to set up a stock picking firm with the view that sell-side was totally commoditised. No one on the buy side used the sell-side. But if I could build a business that was talking to lots of smart investors, maybe that would be interesting.
Mifid 2 was on the horizon, and was supposed to send more budget to independents, which isn’t quite what has happened. So I set up first as a blog, got FCA and SEC regulated in 2011-2012 and have been running a steadily growing and profitable business since then.
What do you do that others don’t?
Shorts. Ninety-five per cent of [sell-side] recommendations are long biased, right? A market-neutral for a bulge bracket is the closest they get to a short. So we do shorts. And we do fieldwork. We do forensic accounting, which very few on the sell-side do. And we take a longer-term view. All the recommendations are for two years, which isn’t super long-term, but it’s definitely longer than the time horizon of most on the buy-side and sell-side these days.
Who are the customers?
We speak to over 100 institutions, so a few hundred individuals. They’re mostly European generalist fund managers, but we have a good mix of long only, big hedge funds, boutique hedge funds, family offices, activists, and private equity. It’s all professional. No retail.
Short selling tends to polarise opinion. How would you defend it?
The idea of shorting still gets people excited, right? And we’re clearly not in the business of activist shorts. Our research isn’t public. It only goes to our clients. But when word gets out that we have put a short on a stock, usually with at least 50 per cent downside, people get very, very agitated.
I think some of that is because no one really does shorts. The banks that issue buy advice have an inherently conflicted business model, so companies and a lot of people in the market find it all very unusual and slightly unnerving.
The way I’ve always looked at critical, questioning, sceptical research is that you’re protecting investors from risk on the long side, and you’re looking for alpha and performance for hedge funds or investors who can go short. There are two sides to it. It’s not just about trying to make money from stocks going down.
On Wirecard, for example, we spoke to lots of shareholders for many years with a view to trying to do some investor protection. And I don’t know who else is protecting investors, because everyone is audited by big accountants, with bankers, sell-side advisers and lawyers. In all the big corporate scandals, none of these institutions has done anything really to protect investors.
A clean audit is a clean audit, but at the end of the day, the auditor is captured by the corporate in a long-term relationship. There’s so much leeway in an audit, and if you signed off on six clean ones in six years, it’s very hard to then change your mind.
Regulators aren’t big enough, well-resourced enough or incentivised to step in and preemptively stop fraud, or to take actions against companies who are pushing the boundaries on accounting, or misrepresenting things to shareholders. So, regulation’s coming after the event. And we’ve not always seen regulators acting in a . . . a balanced way between corporates and short sellers.
So the best defence of shorts is: who else is doing this? Who else is writing critical research to question public companies? We’re making sure there’s some scrutiny.
Was the rise of activist short campaigns over the past decade or so a good or bad thing? There have been some big hits, but the quality of some of the more recent reports hasn’t been great . . .
Good or bad? It’s difficult to say. I think on balance, it’s probably been a good thing. We obviously have a different business model, and I personally wouldn’t have the risk appetite to go in such a public way against corporates.
In the main, the activist research is very, very, very good. It’s held to a higher standard than a normal sell-side report, for the right reasons. It’s having a disproportionate market impact, and the author of the report has put capital to work ahead of time in the name. So, it should be held to the highest possible standard.
But I often think people are overly critical. If you write a 30-page report, there’s probably going to be something in there that’s not completely balanced, even if the author’s done everything to the best of their ability, and it’s going to be pored over by the offended party. Every single word.
But you’re right, the quality of short activism has been mixed. Sometimes it’s been more about target selection. Sometimes it’s less about calling the stock right and more about having an impact on a big stock where you can get a decent position away. Maybe the company just has a weak balance sheet and you might get a share price reaction. Whereas the really successful shorts of 10 years ago were about finding a rock-solid zero.
The business model has changed a bit. Sino-Forest. Wirecard. NMC Health. The Chinese ones that the Americans did on the ADRs. Those were about finding a rock-solid zero, whereas I think the more recent activist shorts have been more about finding a commercial target.
It’s an expensive business to do the research, pay for litigation after the event, deal with regulators. And there’s not much of it left in Europe at the moment either. That might be indicative of where we are in the market cycle, or it may just be that the number of people doing activist shorts has shrunk. It’s a tough business. It’s not something you would want to do forever as a career.
Also, regulatory scrutiny has very nearly killed the activist short model over the past year or so. Does being an ideas shop put a bit of a firewall between you and the regulators?
I mean, we’re very heavily regulated. Everything goes through compliance and legal. But we don’t have any capital at work. We’re doing our own independent work, and we publish to all clients at the same time. We have a really simple business model. Our defence — not that we’d ever need one — is to deliver balanced research that says the stock has a 50 per cent downside to fair value.
Are you offered corporate access? Or are the relationships more antagonistic?
It’s not as bad as you might think. Only about half of our recommendations are short. But we don’t need to speak to a company to do our research. We can do all of our work from publicly available information.
Corporate access is commoditised anyway. Everyone gets corporate access. Meeting the CEO four times a year is what everyone else does. I don’t think it’s a particularly great way of differentiating your research process.
We do normally reach out to the company as part of the process. We do want to have relationships with corporates. We want to get our facts right. We want to get a sense of the management team. And we’re going to cover stocks for a number of years, so we definitely want an open dialogue.
In most cases, we do approach them. We try to engage them. We’ll tell them we’ve written something. We’ll say: we can’t give it to you, but in due course, once our clients have had a chance to deal with it, we can discuss some of the key points.
We have been excluded from capital markets events. A UK plc. which has since been taken out, barred us from a capital markets day. We’ll often get ghosted, just ignoring emails and requests. That’s very common. Until they perhaps get a copy of a report, and then they’re ringing you up trying to get more research and wanting to discuss all these points. And we say, well, we sent you a lot of questions. We requested a meeting. You ignored it. So yes, we get some very, very upset CFOs on the other end of the line.
We do meet a lot of the companies where we have a short recommendation. We are in regular contact. And actually, when they are open and collaborative, when they listen and engage in a discussion, it makes you think the culture of the company is probably quite good. Kudos to them. When a company goes crazy after completely ignoring us, that’s normally quite a big red flag.
We’ve had nearly two decades of buy-the-dip. No one can run a short-only strategy in this market, right?
Yeah, it’s impossible. Kynikos Associates [Jim Chanos’s now-shuttered fund] had their time of being quite successful. Hindenburg’s hit rate was very good. But the market goes up in the long term. And even if it goes down, that’s maybe a once-in-five-year event that doesn’t last very long. Economies grow companies. Bad companies shrink and fall out of the index. A short-only strategy is going to lose money. I don’t know if anyone has made money on a short-only strategy over the long term.
We’ve done some work on how many stocks go down in various timeframes, and it’s a lot. In a year when the market’s up 20 per cent, there may be 30 per cent of stocks that halve. But the big winners keep compounding, getting bigger and taking the market up.
We think there’s always short alpha available. We’re not only doing frauds and accounting shorts, we’re also looking for structural decliners, broken balance sheets, industry change, bad governance. We think that if you hunt wide in a big enough pool it’s possible to generate consistent output on the short side, but you might still lose absolute money because the market just goes up.
The average fund manager has a pretty awful record of finding alpha, long or short. Do you think, on average, fund managers have enough of an understanding of accounting to do their jobs properly?
No.
That’s a short answer.
There are a few exceptional long-only buy-side firms that are amazing at forensic accounting, governance, and deep dive research. And there are a handful of very, very smart hedge funds that have teams of dedicated accounting research analysts. But that’s a small minority of market participants.
I don’t think many people have the incentive to do that hard work. They don’t have the time. The average manager might own 100 names. How are you going to get through 100 names? And then things might be a 1 per cent bet. You wouldn’t be able to justify the time and resources to do a deep, forensic dive on every single name you own. And that’s just fundamental investors. The macro funds, trend following funds, very long-term thematic funds, tech and ESG funds, they’re just market participants who have no interest in forensic accounting.
What always amazes me, though, is that more people don’t do the interesting and useful work. We’ve had big long-only clients who own a big part of a retailer and have never been to a store. I can sort of understand why you might not have downloaded the Cypriot subsidiary filings, but surely you’ve been to a store?
I get that it’s a time issue and a bandwidth issue. But everyone’s going to have to do more, because active management strategies are going to have to become more differentiated against the passive.
Does passive investing make markets even more stupid?
I think it’s wrong to say more stupid, but it’s been hollowed out as a result of the passives. There’s definitely been a juniorisation of the sell-side. There are fewer people covering stocks, they’re less experienced, and there are fewer buy-side participants.
Go to a big company’s capital markets day now and there are a handful of buy-side investors there, when there used to be 50. The big long-onlys have consolidated and have reduced the number of strategies they’re running. A lot of mid-sized hedge funds have vanished. A lot of smart people have gone to work at multi-strategy shops like Balyasny, Citadel, Point72 and Millennium. They’re more interested in risk management, volatility management, and market neutrality, than long-term fundamentals.
So I don’t think stupid is the right word. But there are very few old-school stock pickers left. Hardly anyone in London goes to see the factory and tries to find a good company you’d want to own for 10 years. It just doesn’t happen much any more.
And yet, we seem to have fewer outright stock market frauds than before. Counter-intuitively, are markets getting cleaner?
I think, probably, yes. For now. Because you need a bubble or an IPO cycle to create zeros.
But it’s not just the zeros. After Covid there were ecommerce IPOs with unproven lossmaking business models and wild valuations. You had a whole new pool of good shorts created by a market cycle. Since then, management and private equity haven’t been able to dump companies on to the markets at inflated valuations, so the number of potential big downsides have declined.
There are still thousands of stocks left in Europe. They’re definitely not going to be free of fraud. But with interest rates rising the easy money’s vanished. If the plan is to start a business very quickly, raise a load of debt and take a lot of money out, you would probably fund it on the private side for longer.
So, is that where the fraud’s gone? Private credit?
Yeah, it may well be in the private portfolios, all bought at high valuations.
What you need is a bubble. There was also ESG, which put big market caps on companies with unproven technology, bad governance and bad economics. So, to find the next load of new shorts, it would be helpful to have an IPO cycle.
Well, fingers crossed for AI . . .
Though some of the best shorts have been more conventional: companies that were disintermediated by AI, or had the wrong balance sheet structure, weren’t ready for competition from China. Conventional, fundamental stories rather than headline-grabbing stuff like fraud. If you’re finding one fraud every two or three years, you’re probably doing quite well.
What are the clients asking for today, and how has it changed over the past five years?
We’re definitely seeing an increase in readership of our long product. The market changed quite a bit over the past year. The Americans are coming back to Europe, having lost some confidence in the dollar. They’d been structurally reducing their European exposure for 10 or 20 years, and that’s reversing.
There’s a whole generation of US long-onlys that were so focused on the Magnificent Seven. They don’t really know much about European stocks. There are a lot of £10-£20bn companies in Europe which are not well known or understood. There’s an increasing demand for teach-ins on what a company does.
People are still doing a lot of shorts, but the nature of shorting has changed a bit. Hedge fund strategies are to run smaller positions and stay below the disclosure threshold. We’re seeing fewer huge bets that could be squeezed, either because they have got it wrong or it’s a meme stock. People have been scared away a little bit from shorts. We’ve got in-house data showing the number of institutions in Europe to disclose a short is at record lows since we started the business.
And there are a lot of European small- and mid-caps where you struggle to find the daily liquidity. So even if you have an amazing short, your ability to trade the stock is quite low.
Among retail investors, I’m not sure it’s well understood how tough it is to get borrow on some of the stocks they think are getting shorted to oblivion.
Yeah, and to stay the distance. You have to pay for the borrow. You might have to pay for a dividend. There’s recall risk. And the thesis might take two years to play out. It’s an expensive trade to sit in.
In the 15 years you’ve been running The Analyst, what’s been your favourite idea?
I’m going to go for Let’s Gowex [a Spanish WiFi provider that declared bankruptcy in 2014 after admitting to falsifying accounts]. That’s my favourite because it was all done with fieldwork. We went to Spain and found the WiFi didn’t really work. We went to Ireland and found WiFi hardware that wasn’t switched on. Went to New York and couldn’t find any WiFi related to the company. It was three city trips to get the whole thesis. It was just fun.
The thing I enjoy most about the research is the fieldwork. Finding the factories that don’t exist. It was similar with NMC Health [a UK-listed hospital operator that collapsed in 2020]. Jack, my analyst, flew out to the Middle East and called me up on the first day to say: “Mark, this is a building site. It’s not a hospital.” You could see immediately with your own eyes why the capex in the accounts looked funny.
It’s a bit weird that we have HFT houses trying to get edge by buying satellite imagery to measure Walmart car park densities, while no one thinks to knock on a door in Spain.
Yeah, it’s a journalistic style. But it’s expensive and time consuming. It doesn’t happen because most of the sell-side is lossmaking, and the buy-side in general is not inclined to pay more for research. But you can usually get a signal from the accounts where the fieldwork is going to pay off.
Final question . . . Tell me something good and something bad about having your offices in Clapham North?
Ha! We’re trying to build the independent research valley of South London.
What’s good about it is that you’re outside the City and the West End. You’re out of the bubble. We’re able to have a great office space at a fraction of the cost of being in the City.
What’s not so nice … The detritus between Clapham North Tube Station and the office is just embarrassing. We’re paying for our own cleaner to pick litter off the streets, because Lambeth Council doesn’t do it, and because I hate the idea of my employees walking past burger wrappers and smashed bottles to get to the office. So we’re trying to clean it up.