Hedge Fund That Bet Against GameStop Shuts Down (ft.com) 65
A London-based hedge fund that suffered losses betting against US retailer GameStop during the first meme stock rally in January is shutting its doors [Editor's note: the link may be paywalled; alternative source]. From a report: White Square Capital, run by former Paulson & Co trader Florian Kronawitter, told investors that it would shut its main fund and return capital this month after a review of its business model, according to people familiar with the fund and a letter to investors. White Square, which at its peak managed about $440m in assets, had bet against GameStop, say people familiar with its positioning, and suffered double-digit per cent losses in January.
The move marks one of the first closures of a hedge fund hit by the huge surges in so-called meme stocks. Retail investors, often co-ordinating their actions on online forums such as Reddit's r/WallStreetBets and in some cases deliberately targeting hedge fund short sellers, drove up the price of stocks such as GameStop and cinema chain AMC Entertainment in January and again in recent weeks. GameStop, for instance, soared from less than $20 at the start of the year to more than $480 at its January peak. That led to big losses for some funds, including US-based Melvin Capital, run by Steve Cohen protege Gabe Plotkin, and Light Street Capital, run by Glen Kacher, a former Tiger cub who worked at Julian Robertson's Tiger Management. However, the funds remain in operation, and shortly after its losses Melvin received a $2.75bn investment from Cohen's Point72 Asset Management and Ken Griffin's Citadel. "The decision to close down is related to thinking the equity long-short model is challenged," said Kronawitter.
The move marks one of the first closures of a hedge fund hit by the huge surges in so-called meme stocks. Retail investors, often co-ordinating their actions on online forums such as Reddit's r/WallStreetBets and in some cases deliberately targeting hedge fund short sellers, drove up the price of stocks such as GameStop and cinema chain AMC Entertainment in January and again in recent weeks. GameStop, for instance, soared from less than $20 at the start of the year to more than $480 at its January peak. That led to big losses for some funds, including US-based Melvin Capital, run by Steve Cohen protege Gabe Plotkin, and Light Street Capital, run by Glen Kacher, a former Tiger cub who worked at Julian Robertson's Tiger Management. However, the funds remain in operation, and shortly after its losses Melvin received a $2.75bn investment from Cohen's Point72 Asset Management and Ken Griffin's Citadel. "The decision to close down is related to thinking the equity long-short model is challenged," said Kronawitter.
If there's a bustle in your hedge fund... (Score:4, Funny)
Re:If there's a bustle in your hedge fund... (Score:5, Funny)
Diamond hands FTW.
Sir! This is a casino, not some kind of back alley brokerage...
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I just like the stonk.
Must have been Gamestop (Score:2)
I'm sure it has nothing to do with the hedge model charging exorbitant active management fees for not outperforming the market.
Partially (Score:5, Informative)
That's partially the reason. Some hedge funds do outperform the market. Some don't.
In any case, I think the business model of telegraphing the fact that you are going to buy huge amounts of stock to cover a short position in a given time frame is going to go away. All this stuff is public information. The big players don't like the fact that the small investors can gang up on them. It might be illegal at some time in the future, but it isn't illegal now. So, too bad for them.
Re:Partially (Score:4, Informative)
It might be illegal at some time in the future, but it isn't illegal now. So, too bad for them.
After having evolved to feed specifically on the small fish, shark wails at the immorality of it all when it accidentally tears it’s side open and those little fish get a nice buffet.
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The average hedge fund underperforms the market, if one assumes a good measurement of the market is the S&P 500.
With fees, it just makes things worse.
Now there could be other reasons why hedge funds are desirable - they could, for example, have increased returns relative to risk (not saying they do, I never checked). In this example, the lowered returns would be offset by the decreased volatility. (Again, not sayi
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On average they don't. And if one is outperforming the market at the moment, wait a while, because on average they won't.
And at the moment, on average, they're very much underperforming.
Re:Partially (Score:4, Insightful)
The problem is, even a cow pooping on a grid square will occasionally outperform the market. It just doesn't last.
I'm sure the hedge funds would love to ban small investors from buying up stock in advance of them buying up stock. Most capitalists are all-in for a Soviet style command economy as long as they are the ones in command.
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I'm sure it has nothing to do with the hedge model charging exorbitant active management fees for not outperforming the market.
Practically every hedge fund does that: https://www.investopedia.com/a... [investopedia.com] Hedge fund is basically a fancy synonym for fleecing gullible clients through exorbitant fees.
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In the investor letter announcing the fund’s closure, White Square said that last year, despite that year’s strong performance, two large investors had opted to withdraw their cash and put it in cheap passive funds or private equity. “We experienced first-hand the shift in trend away from hedge fund investing to cheaper alternatives,” it added.
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I don't think a hedgefund has collapsed from screwing customers to hard. This was just the sacrificial hedgefund not protected by the cartel.
There are others that are more leveraged in shorts and a mexican stand-off between retail investors to see who will break first.
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Hedge funds by their nature take large risks by hedging against something. If they bet wrong, they could lose a lot of money; if they bet correctly they get a lot of money. A hedge fund that bet wrong is not surprising to anyone; although hedge funds should not put so much of their capital into one or two bets.
Secret to getting rich - make huge bets with someone else's money. Sooner or later your ship comes in.
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Secret to getting rich: make huge bets with someone else's money, charge them a percentage of the upside, and don't give anything back on the downside.
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Easy enough. Get together enough capital, invest it in something that tracks the NASDAQ, pay out 5% / year, drawing from the principle if necessary.
Where do I collect my $100 billion?
Shorting stock isn't that wise. (Score:2)
In general Stock go up more than they fall. If you bet against a stock, it is probably only best for a Short term trade, where you feel there may a short term hit to the price. But betting on the company going bankrupt and getting it all, isn't the best plan, because often a company will change direction.
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In general Stock go up more than they fall. If you bet against a stock, it is probably only best for a Short term trade, where you feel there may a short term hit to the price. But betting on the company going bankrupt and getting it all, isn't the best plan, because often a company will change direction.
It's not betting on bankruptcy, just a sufficient drop in stock price.
And yes, on average stocks go up, but that's kinda irrelevant. There will still be overpriced stocks that are likely to decrease in value, and if too many people believe stocks only go up then there's going to be a lot of those overpriced stocks that are very good bets to go down.
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It's worse, by shorting more Gamestop stock than existed, they squeezed themselves. To get out of the short position, they needed to buy the stock to return it, buy it back from the people they returned it to, then return it again.
It was constructively a naked short.
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"...they squeezed themselves."
== Their own greed made them stupid, and they were forced to eat it. Just IMHO.
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That is why shorting contracts have due dates. Shorts are not indefinite bets. Each short specifies a time where the stock that was borrowed must be paid back.
That's not quite correct.
Shorting does mean borrowing stock, and that borrowing has an interest rate so there are fees to pay.
But there is no due date. Just an interest rate on the borrowing; i.e. borrowing for more time = more fees.
You may be confusing this with covering the short (i.e. buying to close the short position), and the T+2 settlement time on share transactions. I.e. after closing the position you have 2 days to actually provide the shares. That's the only place where there's a specific time
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Perhaps you are thinking about buying put options, which are contracts that let you bet the price will go down, but that is different from shorting shares of stock.
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Having owned a stock about 12 years ago that was the target of "naked" shorting... this entire thing has been very sweet for me to watch.
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On the other hand, Gamestop is stuck with an outdated business model and no real ability to turn that around. They tried turning that around with some purchases (ex Think Geek) but really didn't understand the business model enough to succeed. Eventually, as things go digital, their game resale business will just die off completely leaving them with no option other than bankruptcy. They are simply doomed.
The temporary rally caused by Reddit activists will eventually die off and the stock price will conti
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A lot of those Reddit activists are going to lose money on this, hopefully not more than they can afford.
I would have liked to have shorted SCO a few years back, but without knowing exactly when the thing was going to tank it would have been a really stupid move. The end came (if I remember correctly) when some court ruled that SCO only had the rights to use Unix but not actual ownership, something I absolutely did not see coming.
Recently I bought some shares in a company which was being shorted. There we
Vague wording. (Score:3)
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If they said "more than 10%", which could be anywhere from 10-infinity%, would that be better ?
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Yeah, bugs me too. "Percent" is a single word.
https://dictionary.cambridge.o... [cambridge.org]
targeting hedge fund *illegal* short sellers (Score:3, Insightful)
They didn't target normal short sellers; they targets a stock shorted 140% - some ILLEGAL shenanigans were afoot and reddit caught them, and managed to profit from it. I think if the SEC had actually caught & prosecuted the illegal short sales, it would have been a slap on the wrist and maybe 1-10 million dollar fine. Reddit managed to hurt the shady hedge funds a LOT more than the SEC ever would have...
short over 100% is not illegal (Score:5, Interesting)
https://www.fool.com/investing... [fool.com]
As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall.
An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares.
More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short.
In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved.
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Except that is not how stocks are over shorted. A better analogy with airline tickets would be the airline is selling a fixed amount of tickets for $300 a piece to the public and travel agencies. Travel Agency A seeing that they can make profit on a desired flight sells tickets for $500 that they do not have by "borrowing" them from another agency, B for $400. However Travel Agency B is doing the same thing by borrowing their tickets from Agency C for $350 and so on. It is important to remember that these a
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https://www.investopedia.com/t... [investopedia.com]
"What Is Naked Shorting
Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock or determine that it can be borrowed before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market.
Despite being made illegal after the 2008â"09 financial crisis, naked shorting continues to happen because of loophole
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As legally defined, they may not have naked shorted, but the situation was constructively a naked short. They necessarily shorted some of the same shares twice. The law just hasn't caught up with that sort of situation.
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I don't really have to prove it. I merely have to raise it as an issue in hopes further legal constraints, audits, and reporting requirements will be put on the practice and to see that additional regulations ensure that any stock that has been shorted should be marked as unlendable.
That said, 140% is incredibly high and you'll find many articles expressing the concern that 140% indicates naked shorting was taking place. Even a stock with only an interset over 40%, such as Workhorse Group Inc. is ranked a
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Good, what they're doing should be illegal (Score:3)
Time to remember the old saying: (Score:5, Insightful)
"The market can stay irrational longer than you can stay solvent."
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Never bet against weaponized autism.
Live by the short (Score:5, Insightful)
Die by the short.
I'm sure there is literally no one who feels the slightest amount of sadness or pity for White Square Capital.
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I momentarily shed a small tear for them -- then I realized I had misread White Square Capital as White Castle and my sad moment dissipated quickly..
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"White Castle -- the other guilty pleasure that makes people scream on the toilet"
Good (Score:5, Insightful)
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No, there's a huge problem with shorting. (For those who don't know how it works, you borrow stock shares from someone with the promise to return them at a future date. You then sell the stock betting its value will go down. Then shortly before the return date you buy them back at the lower price. Pocketing the amount that the stock value dropped.)
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That's not actually true - for a hard and a soft reason... ...max loss can be capped on a short using options; i.e. if you short at $100, then buy a call option at, say, $120. the call option you own gives you the option (but not the obligation) to buy stock at $120 anytime up to the expiry date of the option. Options, in this context, are typically used to hedge a bet; i.e. hedging the short in this case.
The softer option is that (memes aside), stocks don't tend to crash upwards as viciously as they cr
Irrationality and liquidity (Score:5, Interesting)
Now the jokes on them. I laugh at them, but I realize, almost all my net worth is invested in the market, at the mercy of the same jokers and their counterparts in other gambling, oops, trading, houses. Anyway, I am going to be bilked for sure. At least a few of them got taken to cleaners. Small consolation prize at best...
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And... you know... some of them seem downright ... emotional ... over this situation.
Derivatives fully unhinged from reality... (Score:5, Insightful)
It’s far bigger than just greedy over shorting companies that are perceived to be swirling the drain such that just buying and holding stocks can create a squeeze to meme level prices. GameStop went from that flushed floater surviving yet again to raising over a billion dollars simply because the stock market and markets in general are unhinged from any real performance or footing in reality. Price discovery has become price mining and engineering.
The SEC just had to update its rules [reddit.com] such that now accounts are checked by computer and if deficient, must settle within an hour whereas before it was days. This is due to so many fail to delivers and the fact the corruption in the system is reaching a boiling point in its fight against reality. Derivatives are leveraged over 20-1 like in the last financial crash, and this time around the commercial real estate derivatives are looking rather flammable. Hell, markets resemble inverted pyramid jenga towers, transactions laying them taller every day, with market movers eagerly trying to remove the last bars of sanity at the bottom for just a little more cash at the risk of catastrophic collapse. I keep asking myself when then will be now.
Everyone else loses (Score:2)
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Why hasn't anyone (Score:1)
typo (Score:2)
You misspelled "stonks".
Wen Moon? (Score:1)
The point of the market is to price things. (Score:1)