Short seller Carson Block, the founder of research firm Muddy Waters LLC who has exposed accounting problems at a slew of Chinese companies, said on Thursday that he is seriously considering launching a hedge fund investment firm.
"We are more so than ever very seriously considering becoming a fund manager, but it would not be the same sort of Muddy Waters 8,000-page reports," Block said in an interview. "When you're running a fund management business, it takes a lot of resources to put those out."
Block said his hedge fund firm would combine activism with long-short strategies but with an emphasis on betting against companies.
Block became a rising star in the $3 trillion hedge fund industry after he publicly challenged the accounting practices of a series of Chinese companies that trade on North American stock exchanges, and then successfully bet against them by using his own money to short their stocks.
Block said his Muddy Waters firm, which consists of fewer than 10 employees, specializes in producing short-selling research that he distributes free of charge. The firm makes money by trading its principals' own capital, meaning Block puts his dollars behind his work.
"There have been companies that we felt would be good shorts, but they wouldn't really make good Muddy Waters activist report material, so we didn't short them, and we missed some opportunities there," Block said.
"So I think by having money under management, it would enable us to have more resources so that we could spend the right amount of time also managing that non-activist book and capitalizing on those opportunities," he added.
"Every time I've thought about it in the past, I've thought well, there are a lot of headaches with that, and I'm not accountable to anybody but myself at present, and that's a pretty strong allure, but there are arguments in favor of going toward a model where we're more resembling an activist hedge fund as well."
He said if he decided to launch a hedge fund, he would seek to raise more than $200 million in outside money.
To date, Block's most prominent takedown is of Sino-Forest Corp [SCLC.UL], whose shares slumped 74 percent before the Chinese tree plantation operator eventually filed for bankruptcy protection in March 2012.
The collapse forced hedge fund king John Paulson to book $105 million in losses on the stock. Paulson's firm also was sued by a prominent Miami investor, who claimed Paulson failed to conduct proper due diligence on Sino-Forest.
Block said he has "one to two activist campaigns" in the fourth quarter, but would not disclose the companies he is targeting. "We are awash in ideas," he said.
Block used to be based in Hong Kong but fully relocated to California after receiving death threats.
