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Pro Analysis

Chanos says Valeant was biggest loser ever for hedge funds, topping Enron; Cost industry $40 billion

Jim Chanos
Scott Mlyn | CNBC
Jim Chanos

Short-seller Jim Chanos lambasted his hedge fund industry peers for investing in drug company Valeant, saying it is was based on a business model which was a "big lie."

"Valeant epitomizes everything that went wrong with the marketplace," Chanos said at the Evidence-Based Investing conference in New York on Tuesday. It was "the largest single security loss hedge funds have incurred, greater than Lehman, Enron, AIG."

The founder and managing partner of Kynikos Associates estimated the $1 trillion long-short hedge fund industry lost $40 billion being long Valeant. The stock ticked off a number of factors that Chanos looks for in a potential short such as growth by acquisition, fraudulent accounting and crowded shareholder base.

Valeant's business model was "based on the big lie...that it could buy neglected orphan drugs going off patent, that you can purchase portfolio of drugs as opposed to develop them," he said. The stock is down 80 percent this year as investors await the outcome of government investigations into its business practices.

Chanos is known for his bearish calls against high-flying companies like Enron and has been outspoken about his bets against Tesla Motors and Alibaba. Short selling is a form of trading in which traders can bet against a company by selling shares they do not own and buy them back later at a lower price to make a profit.

The money manager also revealed the area of the market he hates the most right now...