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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

#321

Post by nrmitchi »

dcolkitt wrote: post #185
Mo3 wrote: 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…

> 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 would assume that the government forces all GME positions to be liquidated and halts all trading, no matter no many retail and/or institutional traders get upset by it, before allowing the collapse of the global financial system (again).

No matter what game you're playing, there are always "superior" rules, that are not written down. No matter what game you're playing, one of the over-arching rules is "no crippling the global financial system".

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

#322

Post by annexrichmond »

ogre_codes wrote: post #214

Most stunning thing in this article to me: "The GameStop saga marks a fall from grace for Melvin, which gained 52 percent last year, ranking it among the best performing hedge funds ." This is kind of surprising. I personally know a few retail investors who crushed that number. Not with fancy day trading, just owning a few good companies. I know it's a lot harder for institutions to get outsized returns, I just didn'…

One year is a pretty small window to compare the performance of two investors or portfolios. If they are performing better than them for over 5 years, maybe that’s something to write home about.

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

#323

Post by alasdair_ »

fractionalhare wrote: post #196
dataflow wrote: post #139

> 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…

>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.

The claim that Melvin closed their position is something of a game of "telephone" in that it was a CNBC anchor that claimed that "from what I understand" Melvin Capital is out of the stock, after he talked to the CEO (off camera).

Importantly, there was no recording of the conversation, just a journalist claiming a source said something. The fact he used "from what I understand" instead of a direct quote is telling.

Melvin themselves have not (as far as I can see) issued any kind of statement, written or otherwise, that clearly states they have zero position on GME any more.

All of the other stories about the claim simply state "according to CNBC".

My point is that as far as I can see, there is no evidence that Melvin are actually out of their position, other than easily-deniable comments that a single journalist claims "from what I understand" on.

Link here to the video from CNBC: https://www.cnbc.com/video/2021/01/27/melvin-capital-sells-o...

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

#324

Post by alasdair_ »

flunhat wrote: post #221
fractionalhare wrote: post #196

Earlier quoted context omitted.

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…

Thank you 1000x for writing this. I thought I was going insane reading all the comments like “Melvin publicly said they closed their short position, which is suspicious because they said it publicly (if they said nothing, you all would still find it suspicious!), so they are probably lying about closing their short position”

Can you provide a source that states Melvin publicly said this? All I can find are references to CNBC where a journalist claims "from what I understand" Melvin is out of the stock.

The problem with this is that it's easy for the CEO to later say "the journalist misunderstood" or "I said we covered some of our position (1% is 'some' right?)" or many other things.

Is there a definitive statement from Melvin themselves anywhere?

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

#325

Post by nrmitchi »

dataflow wrote: post #319
nrmitchi wrote: post #315

Earlier quoted context omitted.

> I am not a financial advisor and this is not financial advice. Okay as soon as I read this I knew I shouldn't be expecting much, but... > My understanding of your belief is that you think Melvin would not lie due to there being a large risk associated with lying. This really isn't just lying a little bit , and isn't just a large risk . If you're running a fund like this, purposely making materially false statements…

Question: what do you think of this comment? https://news.ycombinator.com/item?id=25984635

That is quite literally a different argument.

The argument being made is that the original funds never exited their original ~$10 shorts. So every $100 increase in stock price is a 10x increase in losses.

If someone re-entered at ~$300, a $100 increase would be a 30% increase in loses.

The scale of these is massively different.

I have absolutely no doubt that other firms have entered short positions.

Claiming that "Melvin may have re-entered afterwards" is obviously a possibility, but is not the same as having lied about exiting in the first place.

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

#326

Post by dcolkitt »

runako wrote: post #275
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/…

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 you could access the S&P 500 in a parallel universe. It has the same return characteristics as the normal S&P 500, but in any given year moves independently. How much does this improve your portfolio? Intuitively you'd think it's not worth anything. It's only as good as your current investments, so what's the point.

But in fact modern portfolio theory tells us that it's a huge improvement. Investing 50/50 in S&P and Bizarro-S&P, substantially improves the amount of return you can access for the same risk. That's because the two diversify each other, and the blend either reduces risk by 30% or lets you leverage up and increase expected returns by 30%.

You're saying, "maybe Melvin isn't a good investment, because it seems about equal to the S&P". But the point is an investment that's about equal to the S&P, yet uncorrelated to the S&P is massively valuable. Even if it has big drawdowns, you typically don't care as long as those drawdowns tend to occur during times when the rest of your portfolio is doing fine.

This is the same reason that a 60/40 stock-bond portfolio has massively outperformed 100% stocks historically. Even though bonds themselves return less than stocks.

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

#327

Post by cambalache »

cpascal wrote: post #302
mledu wrote: post #263

Earlier quoted context omitted.

This is the point Nassim Nicholas Taleb makes in his book Fooled by Randomness. In a long enough timeline luck plays a big part in performance. People or firms like Melvin can perform well in a short timeline but when you stretch the timeline out the reality becomes clearer.

This reminds me of a metaphor made by Burton G. Malkiel in “A Random Walk Down Wall Street”. He attempts to give a possible explanation to why there are star traders or funds that greatly outperform the market. It’s something I like to remind myself of from time-to-time. The metaphor was a coin flipping tournament. You have a bracket of players who flip a coin against an opponent. In each matchup, the player that fli…

Good idea, but bad example: a 100 round tournament (single elimination) would require 2^100 humans, that is a 20 orders of magnitude increase!! You could do 32 rounds at most.

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

#328

Post by aaron695 »

robjan wrote: post #309
cpascal wrote: post #302

Earlier quoted context omitted.

This reminds me of a metaphor made by Burton G. Malkiel in “A Random Walk Down Wall Street”. He attempts to give a possible explanation to why there are star traders or funds that greatly outperform the market. It’s something I like to remind myself of from time-to-time. The metaphor was a coin flipping tournament. You have a bracket of players who flip a coin against an opponent. In each matchup, the player that fli…

This was a common investment scam in the past. Create an email newsletter, split it in half and give opposing advice to each side. You then keep ramping up the fees to the winners until eventually they become one of the losers. Once the list gets too small, create a new entity and start again.

I think you'll find it's not a real implementation. OP's example requires 2^100 people ~10^30

It's a similar problem with the email list.

50+ years ago Scrooge McDuck also had this happen to him. He had a treasure map for gold (In Antarctica I think) which he got conditional on profit sharing and he found gold.

The map sellers ran this scam, sold heaps of different maps because someone would find gold.

I personally don't think Scrooge McDuck was just lucky though.

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

#329

Post by nrmitchi »

ogre_codes wrote: post #243
fractionalhare wrote: post #225

Earlier quoted context omitted.

This is why we have the term, "capacity constraints." Melvin accomplished those returns in a year where they would have started off with $10B or close to it. The retail investors you know did it on what, $100k? $1M? The liquidity available to retail investors is completely different from the liquidity available to firms with an 11 digit book. Assuming those retail investors actually have a working strategy, they can…

Sure, but I'm not talking about complex strategies here. If you can't beat a retail investor with a straightforward portfolio of middle of the road stocks like "AMZN, AAPL, BRK, DIS", what is the point of a hedge at all? Particularly when their tactics put them in such a high risk category. All of what I'm talking about would have scaled perfectly fine with a $10b portfolio, these are giant corporations with a combin…

I think you're sort of mis-understanding one of the main purposes of a hedge fund (at least historically); they are often meant to obtain returns that are un-correlated with the overall market.

Just dumping all of the funds into the market explicitly does not do that.

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

#330

Post by dataflow »

nrmitchi wrote: post #325
dataflow wrote: post #319

Earlier quoted context omitted.

Question: what do you think of this comment? https://news.ycombinator.com/item?id=25984635

That is quite literally a different argument. The argument being made is that the original funds never exited their original ~$10 shorts. So every $100 increase in stock price is a 10x increase in losses. If someone re-entered at ~$300, a $100 increase would be a 30% increase in loses. The scale of these is massively different. I have absolutely no doubt that other firms have entered short positions. Claiming that "M…

I get that legally it's different, but when ordinary people (like me) read "Melvin exited these position", they take it to mean "Melvin accepted the loss and gave up", which is in turn seen as implying "they no longer hold said positions". If Melvin bought and re-shorted all their shares at a similar price, then to many, many people, that's a legal distinction without a material difference. It's not "lying" technically, but it's pedantically misleading enough to be pretty darn close to lying for those of us asking the question. So when people question the veracity of the first statement, they're really wondering about the others too.

Basically, my point is: if your rebuttal to the question of "did they lie?" is "no, that's preposterous, it would be a death sentence for the firm", then your answer might be correct technically as to the literal meaning of the question, but you've missed the spirit of what was being asked.

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