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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

#331

Post by flunhat »

alasdair_ wrote: post #323
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…

>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 came…

You are purposefully misquoting Andrew Ross Sorkin. The "from what I understand" refers to the time Melvin Capital closed their position, not the overall fact that their short interest is closed.

The full quote from Sorkin's segment, ~40 seconds into the video: "Melvin Capital is now out of the stock. They got out of the stock, from what I understand, yesterday afternoon." (https://twitter.com/cnbc/status/1354406938319216640). It could not be more clear -- "from what I understand" refers to the precise timing and not the overall fact.

> 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).

That's not a game of telephone, that's quoting a direct source. Sorkin talked to the CEO of Melvin Capital right before he went on air and then immediately reported it.

> just a journalist claiming a source said something

And it's not "some CNBC anchor," it's a well known journalist (Andrew Ross Sorkin) with a reputation at stake.

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

Because CNBC got the scoop. It's journalistic etiquette!

> no recording of the conversation, just a journalist claiming a source said something

Every single article published in any newspaper ever is a journalist claiming a source said something.

> 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.

The CEO of Melvin Capital calling a prominent CNBC journalist counts as a statement, if you're willing to put aside your rabid paranoia for a few minutes and think critically instead of conspiratorially.

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

#333

Post by letsgoyeti »

dcolkitt wrote: post #326
runako wrote: 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 explanation - one question though, how do we know that Melvin (or any other security/fund) is not correlated to the S&P?

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

#334

Post by keeganpoppen »

sroussey wrote: post #219
rantwasp wrote: post #104

Earlier quoted context omitted.

this is a classic example of a positive feedback loop. wsb did not do all of this but they were the spark that created the fire.

Feedback loop for sure. A movie will be made on this. YOLO! I can see GameStop putting an end to some of this by issuing non-voting shares to one of the hedge funds that is current shorting, giving them a known out and pocketing a huge investment for M&A.

that's what i've been thinking about too-- at what point is it economically expedient for GameStop to sell shares directly to the shorts to bail them out? doesn't seem much weirder than all the credit default swap silliness that's happened for the past few years.

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

#335

Post by dcolkitt »

letsgoyeti wrote: post #333
dcolkitt wrote: post #326

Earlier quoted context omitted.

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 explanation - one question though, how do we know that Melvin (or any other security/fund) is not correlated to the S&P?

To be fair, it probably is. Most equity hedge funds are probably closer to a 50% correlation, and should be benchmarked accordingly (i.e. half T-bills/half S&P). Investors would be able to see its historical monthly returns and regress them against the equity index.

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

#336

Post by Swannie »

Judgmentality wrote: post #11
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 general assumption on WSB is that Melvin Capital is lying and that they haven't closed their positions. I haven't seen any evidence to suggest they've closed it, and have seen circumstantial evidence suggesting they have not. You don't spend money on ads saying "we no longer have a financial stake in this stock" unless you, you know, have a financial stake in this stock. Considering this is a hedge fund, I just a…

If you've watched the big short, you'll understand that the challenge with a short is the timing. You have to get the timing right.

For Melvin Capital, they were right, until they were not - when WSB showed up. They have eaten a loss on this.

But that doesn't mean to say that someone else was not willing to buy their shorts, for a hefty discount, with a significantly longer term time frame strategy (because they don't have to borrow on margin), believing that once it becomes clear that Melvin are out, that Redditors will want out of GME, and GME will likely crash back to something close to its prior levels.

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

#338

Post by runako »

dcolkitt wrote: post #326
runako wrote: 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…

This is good background and all makes sense, but in the context of Melvin we don't have enough data to know whether any of this is true in their case vs just being part of their pitch. (This is essentially true of all hedge funds.)

What appears to be the case is they were edging the QQQ until they incinerated half their capital in a week on a bad bet and poor risk controls. So we now know they are uncorrelated with the S&P, but unfortunately we only know they are uncorrelated to the downside. (We don't know if their outperformance has been a result of real alpha or a strong market plus leverage.)

We saw a lot of these funds in the strong bull market of the 90s and the takeaway I remember was that it's impossible to know ahead of time who's going to blow up and lose all/most of your money.

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

#339

Post by nobrains »

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…

Either I did not understand it, or this doesn't make sense. If the head flipper moves ahead, then that person, truly flipped 100 heads.

Your example would have made sense, if you talking about the 100 times consecutive winner in a coin flip match, with each match, the winner can be heads or tails.

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