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Hedge fund Melvin sustains 53% loss after Reddit onslaught

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Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#161

Post by shoo »

melling wrote: post #88

Warren Buffet and Charlie Munger on shorting: https://youtu.be/GVtaKKn43M8 “It’s ruined a lot of people “ “It’s the sort of thing you can go broke doing”

Instead of learning about short selling from famous long-only investors who don't specialise in short selling and have no particular skills in the area, another idea is to learn about short selling from people who have done it successfully & have built a long career around it.

E.g. consider Jim Chanos & Kynikos Associates. Chanos founded Kynikos in 1985. Kynikos has a short-only fund, a long-short fund and a 190% long/90% short fund (i.e. a +100% net long fund).

This FT alphaville interview with Chanos: https://www.ft.com/content/da70b2f9-3a0b-4258-9996-86dfd6802... contains a few interesting morsels of information -- including some touching on risk management & the risks that short sellers are exposed to in periods of market instability where there is a risk that counterparties might go bankrupt, e.g. during the GFC.

* "I've seen far more stocks go to zero than to infinity"

* "short selling is a portfolio [...] no one position will ever be more than 3 or 4% of the portfolio"

* "if you go into one of our partnerships, as a limited partner, you can only lose what you put in"

* "the short side has a lot of asymmetries: [...] if a position goes for you, it becomes smaller, unlike on the long side"

* "if you gave me $100 and I just had a one stock portfolio on the short side, you wouldn't have to give me any more money and if I shorted Enron $100 and continued to short it on the way down, I could make more than 100%. I'll let you think that through"

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#162

Post by aphextron »

drcross wrote: post #59
MichaelApproved wrote: post #17

Earlier quoted context omitted.

> If they really had exited, why would they bother telling anyone? They have their own customers and reputation to maintain. They’re trying to let their customers know that the damage is done and they’re out. They’re trying to stop their customers from abandoning them.

...or they lied. You're picking one answer and I'm picking a different one, either are just as likely.

> ...or they lied.

That would be hardcore felony level securities fraud. I highly doubt it.

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#163

Post by fairity »

newacct583 wrote: post #14
wrkronmiller wrote: post #5

> On Wednesday Melvin said it had exited its bet against GameStop and repositioned its portfolio. The firm moved to reduce risk in its investments following a turbulent start to January when it lost 30 percent in the first three weeks. Melvin’s leverage ratio is at the lowest it has been since the firm’s founding in 2014, said a source familiar with the firm. The news of Melvin’s January performance was first reporte…

The stock is currently around $300, up by a factor of five from last week and much more than that over its historical base. The question should be who isn't shorting GME, not leading questions about a conspiracy theory as to whether or not Melvin actually closed its shorts or not. I mean, I haven't shorted GME personally. But I've absolutely joked with friends that it's an obvious play. Maybe I should.

You can avoid the borrowing fee and margin call risk by purchasing PUT options. The $320 PUT expiring in 1 year costs $240. I purchased 2 contracts on Wednesday bc I don't see a scenario where the price doesn't crash back down below $60 within a year. Expected ROI of 10-20%. Not a large return, but also a pretty safe bet imo considering their ATH prior to this squeeze was $60, and that was back in 2007.

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#164

Post by fairity »

bluGill wrote: post #110
icedchai wrote: post #75

Earlier quoted context omitted.

It seems less risky to buy puts, not short directly. I wouldn’t want to be short if this goes up another 10x, even briefly. It will go back down but you might get wiped out first.

The problem with puts is they can expire before this calms down. If you can get a short in and not get a margin call this is the opportunity of a lifetime. Only the biggest players dare risk it though.

There are long-dated puts that expire 1-3 years from now. In what world would this not calm down before then?

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#165

Post by wefarrell »

gruez wrote: post #126
kasey_junk wrote: post #116

Just for context Melvin has returned better than 30% returns yearly since 2014. There is a very good chance if you are in their fund you’ll look at the total return and be quite happy with the outcome, especially if their risk is decorelated with the other parts of your portfolio.

>Just for context Melvin has returned better than 30% returns yearly since 2014 That's funny because in another thread someone mentioned that's usually how a lot of "good" investment strategies go. They return above-average returns when the times are good, but they get wiped out every few years/decades by the tail risk.

In one of Robert Shiller's intro to finance courses he discusses funds that have gamed their sharpe ratios by selling off the tails of their distribution returns.

https://bookdown.org/Albert/finance-shiller/efficient-market...

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#166

Post by kortilla »

briefcomment wrote: post #120
tedunangst wrote: post #96

Earlier quoted context omitted.

Not sure what the founder of barstool sports actual experience is in this area. Or whoever else. Also, it's very easy to describe order flow in a disingenuous way (citadel sees the order before the market) that's technically true and will make people think it's front running. Did the experts say front running? Or did they say paid for orders and somebody else said front running?

Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-... And here's a Vice article about it. They don't mention front running, but the outcome sounds the same, in that the customers are not paying the best price for the stock, since the middle man pockets some. https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but…

No, the middle man doesn’t pocket some.

The interesting thing about retail order flow is that market makers can offer it tighter spreads (I.e. better prices) because they know on average there is no edge in there (i.e. some huge fund with non-public knowledge).

That’s why they will literally pay to get order flow they know to be vetted as a bunch of retail investors.

It’s like a casino paying for a stream of blackjack customers that excludes card counters. It’s worth money to them and it’s even worth it for the customers because the casino can offer more payout (e.g. 3:2 instead of 6:5) because there is a smaller chance of getting steamrolled.

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#167

Post by derptron »

notahacker wrote: post #97
drcross wrote: post #59

Earlier quoted context omitted.

...or they lied. You're picking one answer and I'm picking a different one, either are just as likely.

One of them involves them deciding they'd rather be prosecuted by the SEC for lying than use the bailout for what they said they used it for, and the other involves some people on Reddit being wrong. I don't think "either are just as likely"

Hedge funds literally lie all the time, it's second nature for them

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#168

Post by belltaco »

SpicyLemonZest wrote: post #132
nprz wrote: post #114

Earlier quoted context omitted.

I mean the WSB user count has grown from 2.2m on Monday to now 7.5m. If 5 million of those users all bought $100 worth of GME that's half a billion, if they bought $1000, that's 5 billion.

Over 700 million shares were traded last week, so even if every WSB user bought 10 shares, that wouldn't account for close to a majority of the activity.

Volume is meaningless, as the same share might be traded back and forth several times, e.g HFT or order flow buyers flipping stocks within microseconds.

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#169

Post by ClumsyPilot »

f430 wrote: post #42

It's really strange. Why would they openly announce that they have closed shorts and that they are sustaining damage so publicly? My theory is that they are not only doubling down but quadrupling down everytime the stock shoots up. Gamestop has no fundamentals going for it, take a look at its other competitors in the industry, they are all gone. Neither do cases for AMC (who themselves acknowledged and WARNED investo…

"My theory is that they are not only doubling down but quadrupling down everytime the stock shoots up. "

You can do the same at a casino - double your bets every time you loose. The technique works, 100%. The trouble is, it requires exponential amounts of money.

"We have no way of knowing if people posting gains on wsb are doing it on paper accounts or not."

That's starting to sound a lot like "moon landing was faked"

Re: Hedge fund Melvin sustains 53% loss after Reddit onslaught

#170

Post by briefcomment »

gruez wrote: post #152
briefcomment wrote: post #120

Earlier quoted context omitted.

Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-... And here's a Vice article about it. They don't mention front running, but the outcome sounds the same, in that the customers are not paying the best price for the stock, since the middle man pockets some. https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but…

...and here's a financial columnist (ie. an expert) writing about it: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for…

That's fine if market makers stick to the rules.

What do you make of some of what Citadel has done before?

https://www.bloomberg.com/news/articles/2020-07-21/citadel-s...

https://www.sec.gov/news/pressrelease/2017-11.html

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