New | Market short-sellers study behaviour to gain an edge

When Muddy Waters unveiled a short position on Noble Group, it didn’t just scrutinise the commodity trader’s accounts. It also hired a behavioural analysis firm run by former CIA staff to analyse 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 behavioural 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 sceptical 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 behavioural analysis and have no plans to do so.

The past few years have seen a growing number of activist short-sellers, who publish research questioning a company’s accounts whilst betting on its share price falling. They claim they take their research a step further than analysts at banks and brokerages, which enables them to uncover accounting shenanigans.