Businessweek has an interesting piece on how PE and turnaround funds are making life difficult for short-sellers:

But as short-selling has proliferated, it has become increasingly difficult to make money at the game. Whereas a profit-challenged enterprise may once have floundered until shutting down or filing for bankruptcy, many such companies are now targets for private equity firms that style themselves as turnaround artists (see, 10/8/06, “Private Equity Keeps Booming”). What’s more, such firms are often willing to pay a rich premium to the market price for troubled outfits in which they see promise.

As a result, fewer companies work as successful short plays, and the strategy has soured for many. The sector is down 7.56% for the year, according to Ken Heinz, president of Chicago-based Hedge Fund Research. “We are hearing from hedge fund managers that it’s getting harder and harder to make money on the short side,” says Robert Discolo, head of hedge fund strategies at AIG Global Investment Group.