Seeking an edge, short-sellers turn to behavioral analysis

Thu Apr 16, 2015 7:50am EDT
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By Anshuman Daga and Rujun Shen

SINGAPORE (Reuters) - When Muddy Waters unveiled a short position on Noble Group (NOBG.SI: Quote) last week, it didn't just scrutinize the commodity trader's accounts. It also hired a behavioral analysis firm run by former CIA staff to analyze how Noble's executives talked on a recent earnings call.

This type of analysis is the latest unorthodox research method used by short-sellers and independent research firms to boost the impact of reports they issue that challenge companies' accounting methods.

QVerity, the company hired by Muddy Waters, says it analyses the way people communicate to assess if they are being deceptive. It looked at how Noble's management responded to questions and interacted with analysts on its conference call.

"The value that clients, particularly investors, are finding is that through behavioral analysis one can identify potential problems that might not be readily identified through other means," QVerity's CEO Phil Houston, who had a 25-year stint at the CIA, told Reuters.

He says they have many clients in the investment industry ranging from small firms to large financial institutions, but declined to name any.

Many are skeptical about the value this kind of analysis brings though, opting instead to stick with traditional research methods.

"Some will think this is interesting, but we are fundamental analysts and have our own methodology and framework for doing company research," said Carmen Lee, head of OCBC Investment Research. She added that they have never used behavioral analysis and have no plans to do so.


The reception of Noble Group is seen at its headquarters in Hong Kong March 23, 2015. REUTERS/Bobby Yip