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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

#351

Earlier quoted context omitted.

Short interest down massively from Friday. Equities don’t settle instantly. Tomorrow will be bloody.

I kept seeing people saying Friday would be the reckoning and offering various contradictory reasons that orbited around “the margin call expires and they have to buy”. Nobody could say what time the margin call would “expire” or provide a source explaining how that worked, and when none of those things happened and the stock rose back to 300-ish and closed, everyone just updated their takes to Monday instead. How do…

> “the margin call expires and they have to buy”

Not sure what you mean by this, but I presume you're referring to options expiration. Some people, with a tenuous/non existent grasp of this stuff were running around screaming "naked shorts" and thinking that Citadel and other market makers were going to need to buy massive amounts of underlying to deliver against their short calls. But the entire reason a gamma squeeze works is because the MMs are buying in their delta as it moves against them. So that was never a very good theory. Opex also means that a lot of gamma expired, which would offset whatever opex buying actually needed to be done.

> everyone just updated their takes to Monday instead

The average Robinhooder/Twitter jockey perhaps. What actually happened is that S3 Partners, who do predictive analytics on short interest (which are officially released fairly sporadically) have suggested that their early take on Thu/Fri trading is that shorts covered a fairly large amount. Given that this whole squeeze is a momentum game requiring coordination and confidence amongst the longs, taking out a huge chunk of the fuel would likely impact the confidence of a long, which in turn ruins the coordination.

> How do we know this won’t just sputter for another week or two and then end in the most anticlimactic way possible?

We don't, it could sputter on. It could go up, down, or sideways. GME could be permanently a $300 company for all we know. Trades don't deal in absolutes, but rather probabilities.

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

#352

Earlier quoted context omitted.

Why do you think short squeezes happen? It’s not because shorts are being insane and covering. They are literally forced to. You have buying for reasons that aren’t commercial and that’s why short squeezes are so bloody.

These are naked shorts, more shares are shorted in GME than exist in the company.

As the other commenter notes, you do not understand what a naked short is.

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

#353

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/…

Have they been succesful using the tactic that now backfired? Eager to see how what returns they will have in the future.

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

#354
post #71

%53, so far. The problem with the short interest being %140 is that the notional value of shares to cover that extra %40 is in fact, infinite. It's literally everything those funds can sell, borrow, and get bailed out to cover their position. My prediction last week was this has system wide implications, and I'm thinking 1. the Fed will intervene, leverage Robinhood's EULA, and buy out everyone's shares at a price th…

> The problem with the short interest being %140 is that the notional value of shares to cover that extra %40 is in fact, infinite There’s a significant amount of disinformation regarding the 140% figure and what it means in practical terms. I’m curious, do you see a difference between a stock with 99% short interest vs. 101% short interest? If so, what is the difference? (In my mind, there’s no difference - curious…

In the former you can just buy your shares on the open market. In the latter case you need an agreement with the lenders of the shares to remove the doubly lent shares.

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

#355

> On Wednesday Melvin said it had exited its bet against GameStop and repositioned its portfolio. Is this true? Louis Rossmann pointed out they would have a huge incentive to lie about this (to prompt people to sell and drive prices down).

The arguments that Melvin lied about closing their position are as follows: 1. Short interest on GME is still high, even after they claimed to have closed their short position. 2. They have a "huge incentive" to lie about this, because people believe it would encourage a selloff. That is the entirety of the evidence. It is uncritical despite the fact that it gets frenetically repeated on reddit. Here is the evidence…

>2. The second argument is reddit cargo culting "game theory", and it violates both logic and Occam's Razor. If you're a fund manager who lies to the public about closing a highly volatile position that could bankrupt you, you are facing securities fraud and violation of fiduciary duty, respectively. Either of those will pierce the veil of your firm and leave your personal assets liable for reclamation by the SEC and/or angry investors. You will be sued. You will lose.

Yeah but your shorts will be in the money and you probably double your investments instead of losing 53%. There is more to gain than lose.

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

#356
post #155

Earlier quoted context omitted.

No, it's not. According to S3 data they've not. They're running a massive smear compaign to convince the public otherwise.

Incorrect. S3 only shows aggregate short interest. That data does not in anyway indicate Melvin's specific position. Almost certainly what happened is that while Melvin was unwinding other hedge funds were opening up new short positions at the current extremely dislocated prices. And this is exactly why WSB's short squeeze theory is doomed to failure. It's not like once you beat Melvin that all of Wall Street just de…

[deleted]

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

#357

Earlier quoted context omitted.

Incorrect. S3 only shows aggregate short interest. That data does not in anyway indicate Melvin's specific position. Almost certainly what happened is that while Melvin was unwinding other hedge funds were opening up new short positions at the current extremely dislocated prices. And this is exactly why WSB's short squeeze theory is doomed to failure. It's not like once you beat Melvin that all of Wall Street just de…

> only feasible end game is if WSB makes Gamestop the most valuable company in the world and criples the global financial system. Is it possible? Sure, lots of things are possible... I wouldn't bet on them Another good reason to assume this wouldn't happen: the existing system will not let it. You may argue that that is "changing the rules" or "cheating" or "being on the institutions side!", and you're right, but I w…

Exposing those superior rules is the reason why people join the short squeeze. Every new special rule only justifies their existing anger.

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

#358
post #161
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% lon…

Ok, then stop shorting beyond 100%. There are people on HN that are foolish enough to short a stock that is about to be squeezed. Yeah it will go down one day but on that same day the interest payments will have shot up high enough to force you to cover and that's what has driven the price down. Your own bankruptcy.

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

#359
post #238

Earlier quoted context omitted.

2-3 weeks ago when share prices were around $17, GME had a market cap of less than 1.2B. WSB has 7.6 million users now, but I assume it went up a lot recently. Say 2 million of them bought some GME. To buy 50% of the shares a couple weeks ago it would have only taken $296 each. So they could ABSOLUTELY get prices moving significantly. Now of course lots more people have jumped on now. But that 20B volume number is af…

> Say 2 million of them bought some GME. I think you are off by one or two orders of magnitude. I'd wager that a full half of the subscribers haven't even opened reddit in the last week.

Well considering it's currently at 7.8 million subscribers, and a week ago it was 2.1 million subscribers [1] I'd love to know how 4 million redditors subscribed without opening reddit

[1] https://web.archive.org/web/20210125060034/https://www.reddi...

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

#360
post #275

Earlier quoted context omitted.

Context is important, so the Nasdaq 100 (as represented by the QQQ ETF) returned ~49% in 2020, 39% in 2019, and 24% over the last 5 years. Beating the indexes by 5-6 points consistently is very good, but it's important to keep in mind that most equities were doing really well over that period. (Edit: It's been reported elsewhere that these numbers are net of fees. However, it's entirely possible that for taxable acco…

The correct benchmark for a hedge fund is T-bills, not the S&P or the Nasdaq. That's because hedge funds are an absolute return product that offers an income stream uncorrelated to the market. This may sound counterintuitive, but it's the basis of modern portfolio theory. The price that an investor should be willing to pay for an investment has to do with its beta to the broader market. Think of it this way, imagine…

Thanks for the informative comment. Could you give some pointers where I can learn more about this modern portfolio theory?
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