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Hedge fund Melvin sustains 53% loss after Reddit onslaught

320 points by arunbahl 6y ago

vga805 6y ago
We just really like that stock.
- BoorishBears 6y ago
  And the hedge funds making billions off that sentiment do as well of course, Citadel must be blushing at the runaway success of RH right now
  - nimchimpsky 6y ago
    Citadel is just a marketmaker that rh uses, they could switch all their flow to a different mm (who are doign the other 40% of flow already) easily. They don't own it.
    - BoorishBears 6y ago
      Who said anything about ownership besides you? You think they can't profit off their access to RH's order flow during a high volatility event like this? This is exactly what they pay for, to make maddening amounts of money off dumb money pouring in.
  - briefcomment 6y ago
    Edit: This is probably wrong. The funny thing is that the money Citadel makes off of Robinhood is basically front running RH trades. If those trades are for GME, Citadel has to choose between: - getting their front running revenue while increasing the price and making things worse for shorts (which I'm sure Melvin still has, despite their PR) - foregoing their RH revenue to not exacerbate the situation for shorts Pick your poison.
    - astrange 6y ago
      Citadel Securities is not the same company as Citadel. And I don’t see why either of them should care about someone else’s shorts.
      - totalZero 6y ago
        I hate to be pedantic, but they're both part of Citadel LLC. So yeah, they're the same company. They just happen to be two different businesses within the same company.
    - smabie 6y ago
      Citadel is not front running trades. This isn't how PFOF works. People say this over and over again, but it just shows that they have little to no understanding of how a market maker operates. Which is fine, everyone is uninformed about some things. Except if you know nothing about something, you shouldn't post naive statements that you claim as factual, when they are in fact not.
      - briefcomment 6y ago
        You’re right that a lot of people say this. And not just random people, but people with large audiences, and people who presumably have some expertise. What is Robinhood’s relationship with Citadel then?
        tedunangst 6y ago
        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?
        briefcomment 6y ago
        Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-tonight-to-speak-out-on-robinhood-and-gamestop/ar-BB1dbydg 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-are-hedge-funds-like-citadel-its-users-are-the-product https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but at least he links to several articles in the comments. https://twitter.com/toxic/status/1353890772135813121 https://twitter.com/toxic/status/1353890772135813121 This guy describes it as front running. https://mobile.twitter.com/anyaparampil/status/1355984104525869057 https://mobile.twitter.com/anyaparampil/status/1355984104525...
TameAntelope 6y ago
I wonder if all of this would have still happened had retail investors not gotten involved. I just don't understand enough, and feel very vulnerable to misinformation, half-truths, and outright lies...
deleted 6y ago
[deleted]
wrkronmiller 6y ago
> 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 reported by The Wall Street Journal. Which begs the questions: who are the remaining short-sellers and what do their positions look like? Are they other hedge funds with soon-to-expire positions or are they retail investors betting that GME will be back down to $100 or less by next month?
- superzamp 6y ago
  As many have noticed, from a game theory point of view, Melvin announcing they closed their position is a strictly dominant strategy.
- Moodles 6y ago
  A better question is: If Melvin made a huge short position and is now finally out of it, why would they bother telling everyone? ;-)
  - MichaelApproved 6y ago
    So investors in Melvin won’t abandon them. They want to reassure their own investors that the damage is done and they’re out.
    - joekrill 6y ago
      In that case they could most definitely inform their investors directly and there's absolutely no need to make a public statement about it.
      - flunhat 6y ago
        They could, but it's common (and not suspicious) for an investor involved in a public fracas to publicly reveal they've exited their position. Bill Ackman did something similar with Herbalife: https://www.investopedia.com/news/billionaire-bill-ackman-dumps-herbalife-ending-5year-war-betting-against-it/ https://www.investopedia.com/news/billionaire-bill-ackman-du...
sdfhbdf 6y ago
Were all the shorts actually covered? There seemed to have been a lot of contradictory information over the weekend.
- nickysielicki 6y ago
  The shorts, from Melvin and others, have mostly been covered, leaving a lot of people holding bags. https://twitter.com/ihors3/status/1356018482471718916 https://twitter.com/ihors3/status/1356018482471718916 https://s3partners.com/Exclusive.html?utm_source=twitter&utm_medium=announcement&utm_campaign=10ds https://s3partners.com/Exclusive.html?utm_source=twitter&utm... This is not some hedgefund guy trying to spread FUD, he's been pretty consistent in his reporting on this over the past week. ie: this post on Thursday https://www.zerohedge.com/markets/we-have-some-bad-news-gamestop-shorts https://www.zerohedge.com/markets/we-have-some-bad-news-game...
  - nimchimpsky 6y ago
    "because our algo will finish its calculation overnight and give a final number in the morning" Doesn't inspire confidence.
  - vga805 6y ago
    In one of the comments Ihor said the algorithm will be running overnight to get a better idea of the actual number... Is it actually plausible that an algorithm running on presumably one stock needs to run for over a day? I believe S3, they've been reliable so far. But with this much money at stake, it wouldn't surprise me if they've been bought out to spread misinformation.
    - SpicyLemonZest 6y ago
      I can't personally evaluate his credibility, but his claim seems to be that "the algorithm" will be running overnight because new data from Friday's trades is still coming in.
PurpleFoxy 6y ago
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.
- viraptor 6y ago
  Does the Reddit part matter? It seems to be meta humour around completely risky but reasonable behaviour. You can explain pretty much everything about it in standard market terms. Mentioning the memes and crude humour is just getting into drama. (And completely optional)
  - deleted 6y ago
    [deleted]
  - PurpleFoxy 6y ago
    It is somewhat important to describe how these people are not acting rationally or individually and how these internet groups can group together to have very powerful and unusual effects.
    - viraptor 6y ago
      And you did just that without referencing either Reddit or memes.
      - PurpleFoxy 6y ago
        Not mentioning reddit hides information. News companies should aim to tell us as much as possible what is actually going on. And the reality is the current situation is heavily tied to a specific group on reddit. People are also directly visiting the subreddit and they will struggle to understand what is going on which is why the news tries to provide translations and explanations.
grecy 6y ago
> On Wednesday Melvin said it had exited its bet against GameStop and repositioned its portfolio If they really had exited, why would they bother telling anyone? > A Melvin spokesperson declined to comment on the firm’s January performance Hmmmm. They won't talk about performance, but they're very keen to convince everyone they've exited their short position. This reads like yet another press release that all the major outlets have run.
- MichaelApproved 6y ago
  > 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.
  - drcross 6y ago
    ...or they lied. You're picking one answer and I'm picking a different one, either are just as likely.
    - notahacker 6y ago
      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"
      - hh3k0 6y ago
        > 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 Where does the fine for that cap, though?
      - derptron 6y ago
        Hedge funds literally lie all the time, it's second nature for them
kyrieeschaton 6y ago
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?
- londons_explore 6y ago
  My experience of reddit is you can get a "wildly successful" meme or post, yet rarely that translates into more than a few thousand dollars of cash being spent on anything. All the "wildly successful" kickstarters and stuff seem to have commercial backers lined up to make the social media buzz effect appear bigger than it is. I suspect the same happened here.
  - Judgmentality 6y ago
    > All the "wildly successful" kickstarters and stuff seem to have commercial backers lined up to make the social media buzz effect appear bigger than it is. This is interesting (and not at all surprising). Do you have a link to more information or is this just something you've noticed?
  - ClumsyPilot 6y ago
    'spending' on random kickstarter products and investing your savings is obviously quite different. So you can't use one to judge the other
- ihunter2839 6y ago
  Could you elaborate a bit on what you mean by this? I have seen similar comments elsewhere but don't really understand what is being suggested.
  - julianandjuliet 6y ago
    A strat that quant funds use are algorithms that look for movement in the market. When they noticed an uptick in gamestop they bought in. When they buy in the price goes up which signals to other algorithms to also buy in. Thus raising the price and causing a tsunami.
f430 6y ago
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 investors that their operations are simply no long viable due to the pandemic). This is probably a once in a lifetime short, they've seen the order flows from Robinhood, they have probably infiltrated r/wallstreetbets and are egging people to buy in to the "David vs Goliath" narrative which is couldn't be further removed from the truth. Many people who are jumping in now (from all the posts asking what is a margin, or when do I sell, or even how to use a broker app) and I fear that people are walking into a clever trap setup by the hedge funds that are short. There is also a lot of institutional money on the long side and they also have interest in continuing the political narrative because they need somebody to hold the bags. Remember that exuberance of the irrational variety of the 2000s craze, the departure from fundamentals and the mania of the public jumping in while the smart money were happily selling to the eager investing amateur. We have no way of knowing if people posting gains on wsb are doing it on paper accounts or not.
- fractionalhare 6y ago
  > My theory is that they are not only doubling down but quadrupling down everytime the stock shoots up. They would not have survived Monday, Tuesday or Wednesday if they doubled down once instead of closing out, let alone if they did it on every significant increase. Even if you cite the investment from Point72 and Citadel: that's a fraction of what they'd have needed to survive the stock going from $100 to $300+.
  - djeiasbsbo 6y ago
    They could have. If they shorted again on tuesday at >300 they could have made a lot of money by covering the next day when the price dropped due to the buy restrictions. At one point in the aftermarket the stock even hit 500$ and the next day went back down to 190$. That is potwntially a lot of money for the right short positions.
motohagiography 6y ago
%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 that will be profitable but still piss everyone off. 2. the new U.S. administration will use this as leverage for some backburner, discredited radical regulations for things like a financial transaction tax or a tax on assets in custody, but only for retail investors and not their donors, 3. the admin will direct the IRS to prioritize making public examples of new traders who screw up their filings. And that's the optimistic view. The alternative is contagion that takes down Citadel, and causes a lot of institutions to sell otherwise valuable stocks to cover knock-on effect positions, risking things like indexes and pension solvency. Imo, this is a macro level liquidity crisis, and there are some other players who might use the moment as well. E.g. China could dump some of its massive U.S. treasury holdings, ostensibly to hedge dollar devaluation risk, but really it's seizing its moment to cause enough chaos to tip the U.S. into actual domestic chaos while it consolidates its position in Taiwan and Hong Kong. Viewed this way, the Treasury and the administration doesn't really have a choice, assuming they can a) use Robinhood's EULA to sell everyone's shares to the Fed, and b) convince the Fed to provide that liquidity vehicle to unwind this execrably stupid trade. Fanfic? Maybe, but I think the system level risk means the stakes are about opportunities to make moves that upset the global balance of power, and not just a domestic populist issue.
- cj 6y ago
  > 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 if you see it differently)
  - imtringued 6y ago
melling 6y ago
Warren Buffet and Charlie Munger on shorting: https://youtu.be/GVtaKKn43M8 https://youtu.be/GVtaKKn43M8 “It’s ruined a lot of people “ “It’s the sort of thing you can go broke doing”
- shoo 6y ago
  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-4258-9996-86dfd68029ed 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"
  - melling 6y ago
    Yeah, I already know about Chanos. He’s got a great story. I love to listen to his insight. Andrew Left is good too. Chanos was shorting Tesla for several years. Not sure if closed that position. Potentially Unlimited losses. What happens to a 100 million short at $200 that goes to $2000
  - imtringued 6y ago
    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.
xyst 6y ago
If only we can weaponize this collective power for shorting shitty companies that have caused irreparable damage to society and the world (O&G, Koch Industries). Right now the power of shorting companies is held by "institutional" investors simply because of how much funds are controlled by a select group of people and thus can buy and manipulate the market. I would die happy if I saw Exxon or BP go to zero.
- lr4444lr 6y ago
  You want to short companies for moral reasons that have objectively strong fundamentals? That sounds extremely dangerous, financially speaking.
- kortilla 6y ago
  You’re fundamentally misunderstanding the model for shorting. You don’t short companies that aren’t already failing or other investors will happily buy your shares and you’ll be the one squeezed out. > I would die happy if I saw Exxon or BP go to zero. The underlying company would actually need to go bankrupt for this to work. A bunch of shorts can’t sell a bunch of stock an expect it to wipe a company out. Otherwise the company will just continue on and the shorts will bleed out payments or even worse, just buy back all of its stock an go private, really screwing the shorts.
- nradov 6y ago
  It is impossible to drive the Exxon share price to zero through shorting regardless of how much capital you have. And even if that somehow worked, Exxon the corporation would still exist.
kasey_junk 6y ago
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.
- gruez 6y ago
  >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.
  - kasey_junk 6y ago
    Yep. Extremely common pattern. So long as the tail risk is diversified compared to other options that is a perfectly good outcome for many asset managers.
  - wefarrell 6y ago
    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-markets.html https://bookdown.org/Albert/finance-shiller/efficient-market...
- mmahemoff 6y ago
  A rough calculation assuming 35% for 5 years is they made 1.35^5, about ~4.5x. Now it's ~2.2x since they lost 53%. The good news is you didn't get wiped out, but it's about what a "boring" S&P 500 index would have earned since 2014, and would be worse than the index if you had invested after 2014.
  - kasey_junk 6y ago
    People that invest in hedge funds are looking for risk differences as much as total returns. A fund that returns the same as the S&P but has a completely different risk profile is a very strong win.
dataflow 6y ago
> 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).
- Mo3 6y ago
  No, it's not. According to S3 data they've not. They're running a massive smear compaign to convince the public otherwise.
  - dataflow 6y ago
    > According to S3 data they've not. If you have a link you'd be able to share that'd be awesome.
    - brmm 6y ago
      https://isthesqueezesquoze.com/ https://isthesqueezesquoze.com/ See the links near bottom of the page, some are subscriptions though
  - gruez 6y ago
    >According to S3 data they've not. And I suppose that's because short interest isn't going down? Aside from the fact that other short-interest sources (all unofficial, by the way) shows that short interest cooled down last week. it also ignores the fact that it's possible to close short positions by transferring to another fund. I'd imagine there's plenty of funds willing to short GME at $300.
    - kreeben 6y ago
      >> I'd imagine there's plenty of funds willing to short GME at $300 Plenty? What type of mathematical model would support a move like that? Are hedge funds predicting a government bailout? Or are they certain retailers will close on Monday?
dcolkitt 6y ago
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-billion-into-melvin-capital-management-11611604340 https://www.wsj.com/articles/citadel-point72-to-invest-2-75-... [2]https://www.bloomberg.com/news/articles/2019-07-19/cohen-cub-gabriel-plotkin-sees-fund-surge-about-44-this-year https://www.bloomberg.com/news/articles/2019-07-19/cohen-cub... [3]https://www.baltimoresun.com/business/ct-biz-reddit-wall-street-bets-gamestop-melvin-capital-20210127-qk6uwmw5bze35dmvpx7xbgsyf4-story.html https://www.baltimoresun.com/business/ct-biz-reddit-wall-str...
- fractionalhare 6y ago
  > 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]. And those returns are all net of fees.
  - runako 6y ago
    I'm curious; do you know that from some document from the fund? The linked source doesn't appear to support that conclusion.
    - fractionalhare 6y ago
      It's included in the WSJ article about the Point72 and Citadel investment.
      - runako 6y ago
        Thanks!
- autokad 6y ago
  if I gained 50%, 44%, followed by a 53% loss with a 2% fee, I'd be under water for the last 3 years, but the sp500 would have yielded me a 37% gain - virtually no fees. I'd rather the sp500 over these guys
ogre_codes 6y ago
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't expect the best hedge funds didn't do better in what turned out to be a softball market for investors.
- fractionalhare 6y ago
  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 basically invest in anything. If they find alpha in trading some overlooked company worth $100M total, they can deploy all their capital and make an outsized return. If a multibillion dollar hedge fund finds alpha in a $100M company, they can make a great return of 50% on let's say...0.1% of their capital, assuming they can buy 10% of that company without meaningfully moving the price against them. So you have an 11 digit book, and you have to get an outsized return. You either find tons and tons of these little tiny companies you can buy single digit percentages of, or you win on big bets from a blue chips that can absorb your liquidity. Or some mix in between. Or you expand to foreign assets, or another class of asset that can handle the weight you're moving around. But you are fundamentally limited, and whatever you do has a different profile of risk attached to it. You are also bound by the risk thesis of your firm and what your investors' goals are. That's not to say all hedge funds outperform retail. A lot of them plainly suck and fail to accomplish their mandate. But this is too uncharitable a take; the liquidity and risk characteristics are completely different. It's incomparable.
  - ogre_codes 6y ago
    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 combined market cap around $4 trillion.
blackrock 6y ago
I can’t imagine that a bunch of millennials buying and holding 5 shares of stock on GME is causing this. They’re just getting the blame for it. Instead, I think other hedge funds are in the water. The sharks are circling and they’re battling each other. One side is shorting. And the other side is going long. The volatility on this stock is great. And you can play both sides. And the market makers makes money on both sides too!
anonu 6y ago
Why does this share an FT link in android chrome?
worik 6y ago
I have to learn how to spell schadenfreude.
known 6y ago
Another example of Zero-Sum
Abimelex 6y ago
hedge funds are completely broken, there might to make money out of money and a bit of dirty tricks should be common knowledge since the Homm case. https://en.wikipedia.org/wiki/Florian_Homm https://en.wikipedia.org/wiki/Florian_Homm
okprod 6y ago
53% loss but they got the $2b infusion from Point72 and Citadel.

320 points by arunbahl 6y ago

vga805 6y ago

We just really like that stock.

BoorishBears 6y ago
And the hedge funds making billions off that sentiment do as well of course, Citadel must be blushing at the runaway success of RH right now
- nimchimpsky 6y ago
  Citadel is just a marketmaker that rh uses, they could switch all their flow to a different mm (who are doign the other 40% of flow already) easily. They don't own it.
  - BoorishBears 6y ago
    Who said anything about ownership besides you? You think they can't profit off their access to RH's order flow during a high volatility event like this? This is exactly what they pay for, to make maddening amounts of money off dumb money pouring in.
- briefcomment 6y ago
  Edit: This is probably wrong. The funny thing is that the money Citadel makes off of Robinhood is basically front running RH trades. If those trades are for GME, Citadel has to choose between: - getting their front running revenue while increasing the price and making things worse for shorts (which I'm sure Melvin still has, despite their PR) - foregoing their RH revenue to not exacerbate the situation for shorts Pick your poison.
  - astrange 6y ago
    Citadel Securities is not the same company as Citadel. And I don’t see why either of them should care about someone else’s shorts.
    - totalZero 6y ago
      I hate to be pedantic, but they're both part of Citadel LLC. So yeah, they're the same company. They just happen to be two different businesses within the same company.
  - smabie 6y ago
    Citadel is not front running trades. This isn't how PFOF works. People say this over and over again, but it just shows that they have little to no understanding of how a market maker operates. Which is fine, everyone is uninformed about some things. Except if you know nothing about something, you shouldn't post naive statements that you claim as factual, when they are in fact not.
    - briefcomment 6y ago
      You’re right that a lot of people say this. And not just random people, but people with large audiences, and people who presumably have some expertise. What is Robinhood’s relationship with Citadel then?
      - tedunangst 6y ago
        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?
        briefcomment 6y ago
        Here's AOC discussing it https://www.msn.com/en-us/money/other/aoc-returns-to-twitch-tonight-to-speak-out-on-robinhood-and-gamestop/ar-BB1dbydg 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-are-hedge-funds-like-citadel-its-users-are-the-product https://www.vice.com/en/article/qjpnz5/robinhoods-customers-... Also, thread. Can't speak for the expertise of the author, but at least he links to several articles in the comments. https://twitter.com/toxic/status/1353890772135813121 https://twitter.com/toxic/status/1353890772135813121 This guy describes it as front running. https://mobile.twitter.com/anyaparampil/status/1355984104525869057 https://mobile.twitter.com/anyaparampil/status/1355984104525...

TameAntelope 6y ago

I wonder if all of this would have still happened had retail investors not gotten involved. I just don't understand enough, and feel very vulnerable to misinformation, half-truths, and outright lies...

deleted 6y ago

[deleted]

wrkronmiller 6y ago

> 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 reported by The Wall Street Journal. Which begs the questions: who are the remaining short-sellers and what do their positions look like? Are they other hedge funds with soon-to-expire positions or are they retail investors betting that GME will be back down to $100 or less by next month?

superzamp 6y ago
As many have noticed, from a game theory point of view, Melvin announcing they closed their position is a strictly dominant strategy.
Moodles 6y ago
A better question is: If Melvin made a huge short position and is now finally out of it, why would they bother telling everyone? ;-)
- MichaelApproved 6y ago
  So investors in Melvin won’t abandon them. They want to reassure their own investors that the damage is done and they’re out.
  - joekrill 6y ago
    In that case they could most definitely inform their investors directly and there's absolutely no need to make a public statement about it.
    - flunhat 6y ago
      They could, but it's common (and not suspicious) for an investor involved in a public fracas to publicly reveal they've exited their position. Bill Ackman did something similar with Herbalife: https://www.investopedia.com/news/billionaire-bill-ackman-dumps-herbalife-ending-5year-war-betting-against-it/ https://www.investopedia.com/news/billionaire-bill-ackman-du...

sdfhbdf 6y ago

Were all the shorts actually covered? There seemed to have been a lot of contradictory information over the weekend.

nickysielicki 6y ago
The shorts, from Melvin and others, have mostly been covered, leaving a lot of people holding bags. https://twitter.com/ihors3/status/1356018482471718916 https://twitter.com/ihors3/status/1356018482471718916 https://s3partners.com/Exclusive.html?utm_source=twitter&utm_medium=announcement&utm_campaign=10ds https://s3partners.com/Exclusive.html?utm_source=twitter&utm... This is not some hedgefund guy trying to spread FUD, he's been pretty consistent in his reporting on this over the past week. ie: this post on Thursday https://www.zerohedge.com/markets/we-have-some-bad-news-gamestop-shorts https://www.zerohedge.com/markets/we-have-some-bad-news-game...
- nimchimpsky 6y ago
  "because our algo will finish its calculation overnight and give a final number in the morning" Doesn't inspire confidence.
- vga805 6y ago
  In one of the comments Ihor said the algorithm will be running overnight to get a better idea of the actual number... Is it actually plausible that an algorithm running on presumably one stock needs to run for over a day? I believe S3, they've been reliable so far. But with this much money at stake, it wouldn't surprise me if they've been bought out to spread misinformation.
  - SpicyLemonZest 6y ago
    I can't personally evaluate his credibility, but his claim seems to be that "the algorithm" will be running overnight because new data from Friday's trades is still coming in.

PurpleFoxy 6y ago

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.

viraptor 6y ago
Does the Reddit part matter? It seems to be meta humour around completely risky but reasonable behaviour. You can explain pretty much everything about it in standard market terms. Mentioning the memes and crude humour is just getting into drama. (And completely optional)
- deleted 6y ago
  [deleted]
- PurpleFoxy 6y ago
  It is somewhat important to describe how these people are not acting rationally or individually and how these internet groups can group together to have very powerful and unusual effects.
  - viraptor 6y ago
    And you did just that without referencing either Reddit or memes.
    - PurpleFoxy 6y ago
      Not mentioning reddit hides information. News companies should aim to tell us as much as possible what is actually going on. And the reality is the current situation is heavily tied to a specific group on reddit. People are also directly visiting the subreddit and they will struggle to understand what is going on which is why the news tries to provide translations and explanations.

grecy 6y ago

> On Wednesday Melvin said it had exited its bet against GameStop and repositioned its portfolio If they really had exited, why would they bother telling anyone? > A Melvin spokesperson declined to comment on the firm’s January performance Hmmmm. They won't talk about performance, but they're very keen to convince everyone they've exited their short position. This reads like yet another press release that all the major outlets have run.

MichaelApproved 6y ago
> 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.
- drcross 6y ago
  ...or they lied. You're picking one answer and I'm picking a different one, either are just as likely.
  - notahacker 6y ago
    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"
    - hh3k0 6y ago
      > 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 Where does the fine for that cap, though?
    - derptron 6y ago
      Hedge funds literally lie all the time, it's second nature for them

kyrieeschaton 6y ago

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?

londons_explore 6y ago
My experience of reddit is you can get a "wildly successful" meme or post, yet rarely that translates into more than a few thousand dollars of cash being spent on anything. All the "wildly successful" kickstarters and stuff seem to have commercial backers lined up to make the social media buzz effect appear bigger than it is. I suspect the same happened here.
- Judgmentality 6y ago
  > All the "wildly successful" kickstarters and stuff seem to have commercial backers lined up to make the social media buzz effect appear bigger than it is. This is interesting (and not at all surprising). Do you have a link to more information or is this just something you've noticed?
- ClumsyPilot 6y ago
  'spending' on random kickstarter products and investing your savings is obviously quite different. So you can't use one to judge the other
ihunter2839 6y ago
Could you elaborate a bit on what you mean by this? I have seen similar comments elsewhere but don't really understand what is being suggested.
- julianandjuliet 6y ago
  A strat that quant funds use are algorithms that look for movement in the market. When they noticed an uptick in gamestop they bought in. When they buy in the price goes up which signals to other algorithms to also buy in. Thus raising the price and causing a tsunami.

f430 6y ago

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 investors that their operations are simply no long viable due to the pandemic). This is probably a once in a lifetime short, they've seen the order flows from Robinhood, they have probably infiltrated r/wallstreetbets and are egging people to buy in to the "David vs Goliath" narrative which is couldn't be further removed from the truth. Many people who are jumping in now (from all the posts asking what is a margin, or when do I sell, or even how to use a broker app) and I fear that people are walking into a clever trap setup by the hedge funds that are short. There is also a lot of institutional money on the long side and they also have interest in continuing the political narrative because they need somebody to hold the bags. Remember that exuberance of the irrational variety of the 2000s craze, the departure from fundamentals and the mania of the public jumping in while the smart money were happily selling to the eager investing amateur. We have no way of knowing if people posting gains on wsb are doing it on paper accounts or not.

fractionalhare 6y ago
> My theory is that they are not only doubling down but quadrupling down everytime the stock shoots up. They would not have survived Monday, Tuesday or Wednesday if they doubled down once instead of closing out, let alone if they did it on every significant increase. Even if you cite the investment from Point72 and Citadel: that's a fraction of what they'd have needed to survive the stock going from $100 to $300+.
- djeiasbsbo 6y ago
  They could have. If they shorted again on tuesday at >300 they could have made a lot of money by covering the next day when the price dropped due to the buy restrictions. At one point in the aftermarket the stock even hit 500$ and the next day went back down to 190$. That is potwntially a lot of money for the right short positions.

motohagiography 6y ago

%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 that will be profitable but still piss everyone off. 2. the new U.S. administration will use this as leverage for some backburner, discredited radical regulations for things like a financial transaction tax or a tax on assets in custody, but only for retail investors and not their donors, 3. the admin will direct the IRS to prioritize making public examples of new traders who screw up their filings. And that's the optimistic view. The alternative is contagion that takes down Citadel, and causes a lot of institutions to sell otherwise valuable stocks to cover knock-on effect positions, risking things like indexes and pension solvency. Imo, this is a macro level liquidity crisis, and there are some other players who might use the moment as well. E.g. China could dump some of its massive U.S. treasury holdings, ostensibly to hedge dollar devaluation risk, but really it's seizing its moment to cause enough chaos to tip the U.S. into actual domestic chaos while it consolidates its position in Taiwan and Hong Kong. Viewed this way, the Treasury and the administration doesn't really have a choice, assuming they can a) use Robinhood's EULA to sell everyone's shares to the Fed, and b) convince the Fed to provide that liquidity vehicle to unwind this execrably stupid trade. Fanfic? Maybe, but I think the system level risk means the stakes are about opportunities to make moves that upset the global balance of power, and not just a domestic populist issue.

cj 6y ago
> 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 if you see it differently)
- imtringued 6y ago

melling 6y ago

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

shoo 6y ago
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-4258-9996-86dfd68029ed 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"
- melling 6y ago
  Yeah, I already know about Chanos. He’s got a great story. I love to listen to his insight. Andrew Left is good too. Chanos was shorting Tesla for several years. Not sure if closed that position. Potentially Unlimited losses. What happens to a 100 million short at $200 that goes to $2000
- imtringued 6y ago
  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.

xyst 6y ago

If only we can weaponize this collective power for shorting shitty companies that have caused irreparable damage to society and the world (O&G, Koch Industries). Right now the power of shorting companies is held by "institutional" investors simply because of how much funds are controlled by a select group of people and thus can buy and manipulate the market. I would die happy if I saw Exxon or BP go to zero.

lr4444lr 6y ago
You want to short companies for moral reasons that have objectively strong fundamentals? That sounds extremely dangerous, financially speaking.
kortilla 6y ago
You’re fundamentally misunderstanding the model for shorting. You don’t short companies that aren’t already failing or other investors will happily buy your shares and you’ll be the one squeezed out. > I would die happy if I saw Exxon or BP go to zero. The underlying company would actually need to go bankrupt for this to work. A bunch of shorts can’t sell a bunch of stock an expect it to wipe a company out. Otherwise the company will just continue on and the shorts will bleed out payments or even worse, just buy back all of its stock an go private, really screwing the shorts.
nradov 6y ago
It is impossible to drive the Exxon share price to zero through shorting regardless of how much capital you have. And even if that somehow worked, Exxon the corporation would still exist.

kasey_junk 6y ago

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.

gruez 6y ago
>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.
- kasey_junk 6y ago
  Yep. Extremely common pattern. So long as the tail risk is diversified compared to other options that is a perfectly good outcome for many asset managers.
- wefarrell 6y ago
  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-markets.html https://bookdown.org/Albert/finance-shiller/efficient-market...
mmahemoff 6y ago
A rough calculation assuming 35% for 5 years is they made 1.35^5, about ~4.5x. Now it's ~2.2x since they lost 53%. The good news is you didn't get wiped out, but it's about what a "boring" S&P 500 index would have earned since 2014, and would be worse than the index if you had invested after 2014.
- kasey_junk 6y ago
  People that invest in hedge funds are looking for risk differences as much as total returns. A fund that returns the same as the S&P but has a completely different risk profile is a very strong win.

dataflow 6y ago

> 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).

Mo3 6y ago
No, it's not. According to S3 data they've not. They're running a massive smear compaign to convince the public otherwise.
- dataflow 6y ago
  > According to S3 data they've not. If you have a link you'd be able to share that'd be awesome.
  - brmm 6y ago
    https://isthesqueezesquoze.com/ https://isthesqueezesquoze.com/ See the links near bottom of the page, some are subscriptions though
- gruez 6y ago
  >According to S3 data they've not. And I suppose that's because short interest isn't going down? Aside from the fact that other short-interest sources (all unofficial, by the way) shows that short interest cooled down last week. it also ignores the fact that it's possible to close short positions by transferring to another fund. I'd imagine there's plenty of funds willing to short GME at $300.
  - kreeben 6y ago
    >> I'd imagine there's plenty of funds willing to short GME at $300 Plenty? What type of mathematical model would support a move like that? Are hedge funds predicting a government bailout? Or are they certain retailers will close on Monday?

dcolkitt 6y ago

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-billion-into-melvin-capital-management-11611604340 https://www.wsj.com/articles/citadel-point72-to-invest-2-75-... [2]https://www.bloomberg.com/news/articles/2019-07-19/cohen-cub-gabriel-plotkin-sees-fund-surge-about-44-this-year https://www.bloomberg.com/news/articles/2019-07-19/cohen-cub... [3]https://www.baltimoresun.com/business/ct-biz-reddit-wall-street-bets-gamestop-melvin-capital-20210127-qk6uwmw5bze35dmvpx7xbgsyf4-story.html https://www.baltimoresun.com/business/ct-biz-reddit-wall-str...

fractionalhare 6y ago
> 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]. And those returns are all net of fees.
- runako 6y ago
  I'm curious; do you know that from some document from the fund? The linked source doesn't appear to support that conclusion.
  - fractionalhare 6y ago
    It's included in the WSJ article about the Point72 and Citadel investment.
    - runako 6y ago
      Thanks!
autokad 6y ago
if I gained 50%, 44%, followed by a 53% loss with a 2% fee, I'd be under water for the last 3 years, but the sp500 would have yielded me a 37% gain - virtually no fees. I'd rather the sp500 over these guys

ogre_codes 6y ago

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't expect the best hedge funds didn't do better in what turned out to be a softball market for investors.

fractionalhare 6y ago
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 basically invest in anything. If they find alpha in trading some overlooked company worth $100M total, they can deploy all their capital and make an outsized return. If a multibillion dollar hedge fund finds alpha in a $100M company, they can make a great return of 50% on let's say...0.1% of their capital, assuming they can buy 10% of that company without meaningfully moving the price against them. So you have an 11 digit book, and you have to get an outsized return. You either find tons and tons of these little tiny companies you can buy single digit percentages of, or you win on big bets from a blue chips that can absorb your liquidity. Or some mix in between. Or you expand to foreign assets, or another class of asset that can handle the weight you're moving around. But you are fundamentally limited, and whatever you do has a different profile of risk attached to it. You are also bound by the risk thesis of your firm and what your investors' goals are. That's not to say all hedge funds outperform retail. A lot of them plainly suck and fail to accomplish their mandate. But this is too uncharitable a take; the liquidity and risk characteristics are completely different. It's incomparable.
- ogre_codes 6y ago
  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 combined market cap around $4 trillion.

blackrock 6y ago

I can’t imagine that a bunch of millennials buying and holding 5 shares of stock on GME is causing this. They’re just getting the blame for it. Instead, I think other hedge funds are in the water. The sharks are circling and they’re battling each other. One side is shorting. And the other side is going long. The volatility on this stock is great. And you can play both sides. And the market makers makes money on both sides too!

anonu 6y ago

Why does this share an FT link in android chrome?

worik 6y ago

I have to learn how to spell schadenfreude.

known 6y ago

Another example of Zero-Sum

Abimelex 6y ago

hedge funds are completely broken, there might to make money out of money and a bit of dirty tricks should be common knowledge since the Homm case. https://en.wikipedia.org/wiki/Florian_Homm https://en.wikipedia.org/wiki/Florian_Homm

okprod 6y ago

53% loss but they got the $2b infusion from Point72 and Citadel.