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Hedge fund Melvin sustains 53% loss after Reddit onslaught

arstechnica.com

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

#291

Post by mathattack »

lr4444lr wrote: post #133
mathattack wrote: post #73

Earlier quoted context omitted.

This isn’t that big a deal. LTCM was levered up 100 to 1 when it got bailed out on its 3 billion notional. Bear and Lehman were levered up 30 to 1 on their billions of assets. I don’t see that kind of leverage or counterparts risk here. A hedge fund or two blows up. Maybe they take a small investment bank with them. The system can survive that shock.

The Fed coordinated the LTCM buyout, but it was not public money, IIRC. A federal bailing out of a completely non FDIC insured private capital firm would be uncharted territory, I think.

It was also a much bigger problem. Trillions, not billions, due to all the leverage they used.

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

#292

Post by mathattack »

rantwasp wrote: post #98
mathattack wrote: post #73

Earlier quoted context omitted.

This isn’t that big a deal. LTCM was levered up 100 to 1 when it got bailed out on its 3 billion notional. Bear and Lehman were levered up 30 to 1 on their billions of assets. I don’t see that kind of leverage or counterparts risk here. A hedge fund or two blows up. Maybe they take a small investment bank with them. The system can survive that shock.

you believe markets are rational. they are not. if the hedge funds that messed up unload shares of other companies they own to eventually cover, this could easily escalate via a positive feedback loop collapsing the whole market (the fact that we’re in a market that ignores fundamentals is also not helping). so the fed just just force the hedge funds to cover in a controller way (ie you’re no longer allowed to short,…

Not arguing rationality. Just arguing that it’s too small for the Fed to care. 14 billion on one stock doesn’t tank the market. Tesla or Apple can move the market that much on one earnings announcement.

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

#293

Post by jussij »

kyrieeschaton wrote: post #29

How much evidence is there that the "reddit onslaught" actually moved the price, as opposed to them being the stalking horse for more sophisticated actors with more capital exercising a vanilla short squeeze strategy?

The thing that moved the share price up was simple supply and demand.

From what I've read the short sellers had taken a short interest that exceeded 100% of the available GameStop shares.

But remember these are short sellers are selling something they don't yet own.

They are selling a promise to sell shares at some time in the future for given price.

When that future date turns up the they are forced into the market to buy shares at what ever price just so they can full fill their original promise to sell shares.

They have no choice in this as it was the contract they signed.

Now because shareholders weren't prepared to sell, that created massive buying pressure which then drove up the price.

I suspect where reddit played it's part is they spread the word that the shore sellers had taken up such a massive short position, adding to the buy pressure and effectively killing off any sell pressure, which then makes that short sell position even worse..

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

#294

Post by dcolkitt »

jabberwcky wrote: post #286
dcolkitt wrote: post #193

It should be noted that Melvin Capital returned over 50% in 2020[1], 44% in 2019[2], and has averaged above 30% annual returns since inception[3]. In other words, even though this is definitely painful, even inclusive of this event, it's one of the best performing hedge funds of the past decade. [1] https://www.wsj.com/articles/citadel-point72-to-invest-2-75-... [2] https://www.bloomberg.com/news/articles/2019-07-19/…

It should also be noted Melvin would not have achieved these results without leverage, which is precisely why a single holding almost destroyed the fund. Comparing unlevered benchmark index return to ultra-levered fund return simply doesn't work. The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone.

> The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone.

The S&P had a 54% drawdown in 2008.

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

#295

Post by zz865 »

kyrieeschaton wrote: post #29

How much evidence is there that the "reddit onslaught" actually moved the price, as opposed to them being the stalking horse for more sophisticated actors with more capital exercising a vanilla short squeeze strategy?

Lots of pros can spot a short squeeze, I'm sure there is a bunch of smart money too.

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

#296

Post by aerovistae »

tpmx wrote: post #145
aerovistae wrote: post #143

Earlier quoted context omitted.

Wow.

Wow what? Yes, I wrote that people here tend to speak English rather than Turkish in this forum. Horrible me.

No, wow that you called someone out on writing something slight different from the convention despite it not hindering your ability to understand the sentence, and suggested they were doing it as some kind of secret signal. Makes me wonder about your mental state.

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

#297

Post by PragmaticPulp »

jussij wrote: post #293
kyrieeschaton wrote: post #29

How much evidence is there that the "reddit onslaught" actually moved the price, as opposed to them being the stalking horse for more sophisticated actors with more capital exercising a vanilla short squeeze strategy?

The thing that moved the share price up was simple supply and demand. From what I've read the short sellers had taken a short interest that exceeded 100% of the available GameStop shares. But remember these are short sellers are selling something they don't yet own. They are selling a promise to sell shares at some time in the future for given price. When that future date turns up the they are forced into the market…

> From what I've read the short sellers had taken a short interest that exceeded 100% of the available GameStop shares.

When someone shorts a stock, it creates a new long position as well. The term is "short sell" because the borrowed shares are sold to someone else. The new buyer is also long.

Long interest is always greater than short interest for this reason. This is why short interest can be greater than 100%.

The facts didn't really matter in this pump, though. The running joke on Reddit was that no one was reading the "DD" anyway, just hopping on the bandwagon.

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

#298

Post by fortran77 »

PurpleFoxy wrote: post #8

The best part about this whole situation is news companies having to translate crude reddit humour and logic in to something old people can understand. Seeing them trying to explain why billions of dollars move because of people who refer to themselves as retards who want to earn money to buy chicken tenders.

Us old people understand--and laugh at--reddit humor just fine.

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

#299

Post by unethical_ban »

015a wrote: post #89
mathattack wrote: post #73

Earlier quoted context omitted.

This isn’t that big a deal. LTCM was levered up 100 to 1 when it got bailed out on its 3 billion notional. Bear and Lehman were levered up 30 to 1 on their billions of assets. I don’t see that kind of leverage or counterparts risk here. A hedge fund or two blows up. Maybe they take a small investment bank with them. The system can survive that shock.

I agree; its important to keep in mind that GME's total market cap, even after all of this, is only ~$22B. A 140% short position is bad (even if that's the real number, which I doubt), but in the scope of all things, not world-ending. Some hedge funds will die from this, and we'll probably have a few weeks of overall market downturn similar to last year, but we're not talking about "the entire US real estate market"…

Let's also absorb the fact that one firm can "lose" 22B in value and no one involved feels directly hurt.

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

#300

Post by jabberwcky »

dcolkitt wrote: post #294
jabberwcky wrote: post #286

Earlier quoted context omitted.

It should also be noted Melvin would not have achieved these results without leverage, which is precisely why a single holding almost destroyed the fund. Comparing unlevered benchmark index return to ultra-levered fund return simply doesn't work. The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone.

> The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone. The S&P had a 54% drawdown in 2008.

Which could have been anywhere between an 81% to 810% drawdown in a typical leveraged strategy. Very few levered positions would have survived it without stopping out or completely blowing up, but an unlevered position absolutely could have -- and most (long term buy and hold) did
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