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Institutional traders (hedge fund, i-banks, prop traders, hft) have the advantage of deep pockets and the financial literacy to be able to execute strategies wh

Institutional traders (hedge fund, i-banks, prop traders, hft) have the advantage of deep pockets and the financial literacy to be able to execute strategies which create easy returns. Many of these strategies are easily scalable to turn a small edge into a big one, using leverage. Oftentimes these strategies have an asymmetric risk profile, with low probability of losing a lot of money (sometimes with unlimited downside potential), for example: - writing out of the money options for the premiums - shorting stocks with leverage - '08s frenzy of selling credit default swaps - forex trading with spreads so low that they take 100x+ leverage Usually, when these strategies work, it's easy money and they get addicted to the easy returns. They scale the strategies up to a level of risk they can't handle. Like having 140% short interest relative to GME's float. When these strategies blow up in their faces, it wipes them out completely, to the level of requiring bailouts. Main street (retail investors, taxpayers) have had enough of this, and a lot of anger is directed at institutional investors for always getting the easy money and the bailouts at their expense. They want to see the game applied fairly, such that when the bets go sour, they go bankrupt and don't get bailed out like in 2008. In the 2015 CHF forex crisis, many brokers went bankrupt overnight. That's what should happen to Melvin, and to anyone who takes the stupid risky bets that don't work out.

Tarq0n 6y ago
Bailouts go to banks because the government is on the hook for insuring cash deposits anyway. Do you have any examples of hedge funds being bailed out?
- tonfa 6y ago
  I think Bear Stearns might count for some people. (tho was more about buying the good assets to avoid adding even more fire to the crisis, I think investors were mostly wiped out)
- deleted 6y ago
  [deleted]
- hn_throwaway_99 6y ago
  The 98 bailout of Long Term Capital Management was pretty legendary - there were books about it: https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1998_bailout https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1... Now, granted, public funds weren't used for the bailout, in this case it was more the Fed organizing private banks for the bailout. Also, the investors in LTCM still lost a ton of money. But LTCM is still a great prototypical example of "vacuuming up nickels in front of a steamroller", i.e. these traders can take these positions (LTCM was focused on merger arbitrage IIRC) that seem like a license to print money, except they invariably can lead to some giant risk blowup. And when they fail, they have a knack for taking down the whole financial system with them so the government has to get involved (even if it is just cajoling other bankers in a room) to bail them out.
  - dcolkitt 6y ago
    The point is though there's never been another LTCM in nearly a quarter of a century. LTCM was one of the first major fixed income arbitrage funds, a strategy that's uniquely sensitive to cheap leverage. They were able to exploit their prime brokers to give them tons of leverage at essentially zero costs. Since LTCM was one of the first, the banks didn't really know how to model their counterparty risk and they were dazzled by the prestige. Since that occurred there's been a ton more hedge funds, and banks have way better systems for managing that level of counterparty exposure. Plus the post-GFC regulations severely limit bank leverage anyway, so they couldn't give cheap leverage to their hedge fund clients even if they wanted to. Again that's why we've never seen another LTCM in nearly a quarter of a century. Pointing to LTCM as an example of risk in the financial system of 2021 would be like pointing to Chernobyl as an example of risks in modern nuclear reactors.
    - Gibbon1 6y ago
      > The point is though there's never been another LTCM in nearly a quarter of a century. cough Lehman Brothers went down in 2008.
      - fractionalhare 6y ago
throwaway2007b 6y ago
> institutional investors for always getting the easy money and the bailouts at their expense When was a hedge fund last bailed out with public funds? They typically don't. Like them or not, they have historically been left to fail, or be bought out by their competition.
- lilott8 6y ago
  While a cursory search appears to prove your point (given the constraint of "public funds"), the fed has bailed out hedge funds [1], I don't remember reading that all. Probably the quietest "bailout" comes from Long Term Capital Management in 1998 was basically bailed out by banks at the urging of the feds[2]. It seems that most funds are left to die [3] (or, more alarmingly, dissolved at the hands at the SEC for insider trading (I'm sensing a trend...)) Perhaps, as "an exercise left to the user", I'll look more deeply at this matter; as it's quite interesting. [1] https://www.nytimes.com/2020/07/23/business/economy/hedge-fund-bailout-dodd-frank.html https://www.nytimes.com/2020/07/23/business/economy/hedge-fu... [2] https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management [3] https://www.investopedia.com/articles/investing/101515/3-biggest-hedge-fund-scandals.asp https://www.investopedia.com/articles/investing/101515/3-big...
smabie 6y ago
I get what you're saying but I don't think I've ever heard professional investors describe generating returns as "easy." Making money at a trading or investment firm is serious work, and no one takes it lightly. Using your example of writing options, market makers who do this are very cognizant and paranoid about the risks involved. However, excess kurtosis and skew (left side tail risk) has definitely wiped out a number of firms, so your point is somewhat valid. I just wanted to point out that when every trader at a firm has their life savings in the company fund, they don't go around slinging YOLO trades. This is serious business, and the vast majority of participants act accordingly (I have met some idiots tho, but most of them went or are going out of business). But it doesn't take that many idiots to cause a lot of mess, so that's another factor to consider.
- mgalgs 6y ago
  > I don't think I've ever heard professional investors describe generating returns as "easy." Well here ya go: https://youtu.be/VMuEis3byY4 https://youtu.be/VMuEis3byY4 Jim Cramer openly bragging about how easy it was to manipulate the market when he was a hedge fund manager.
  - dcolkitt 6y ago
    Jim Cramer is a character on TV. I would take his opinion on finance about as seriously as I'd take Saul Goodman's opinion on the practice of law.
    - imesh 6y ago
      Jim Cramer ran a hedge fund from 1987-2001.
      - joubert 6y ago
        Interesting write-up of the performance of Cramer's investments https://en.wikipedia.org/wiki/Jim_Cramer#Performance_of_Cramer's_investments https://en.wikipedia.org/wiki/Jim_Cramer#Performance_of_Cram...
foldingmoney 6y ago
>Main street (retail investors, taxpayers) have had enough of this, and a lot of anger is directed at institutional investors for always getting the easy money and the bailouts at their expense. They want to see the game applied fairly, such that when the bets go sour, they go bankrupt and don't get bailed out like in 2008. In the 2015 CHF forex crisis, many brokers went bankrupt overnight. That's what should happen to Melvin, and to anyone who takes the stupid risky bets that don't work out. Hedge funds mostly invest client money, not their own. Yes they take pretty hefty fees but they're trying to make money for their clients, who typically are main street.
- onlyrealcuzzo 6y ago
  Are they? Do many people invest in Hedge Funds with their 401ks? Aren't the vast majority of regular people's 401ks tied up in Index Funds? My understanding was that hedge funds started mostly as a way to be more protective of wealth - i.e. you were sacrificing some potential gains to be more certain you wouldn't lose more than x%. Hedge funds have a lot more focus than that now - but (my understanding at least) is that hedge funds still are mostly for people with high net worths.
  - foldingmoney 6y ago
    My understanding is that most hedge funds get the bulk of capital from institutional investors, e.g. pension funds.
dcolkitt 6y ago
> GME's float. When these strategies blow up in their faces, it wipes them out completely, to the level of requiring bailouts. Not a single hedge fund has gone bankrupt from GME, much less gotten a bailout. I can virtually guarantee you that none will. Melvin was down 53%, but still has more assets than they did in the beginning of 2020. They got an external investment from another hedge fund, but that's hardly going bankrupt, and certainly not a bailout. Besides Melvin, not a single other major hedge fund lost more than 20% on Gamestop, let alone went bankrupt.
- piva00 6y ago
  As far as I know this information isn't public and is based on speculation, no? If not, care to provide some sources and/or data that aren't based on the funds' PR department?

Tarq0n 6y ago

Bailouts go to banks because the government is on the hook for insuring cash deposits anyway. Do you have any examples of hedge funds being bailed out?

tonfa 6y ago
I think Bear Stearns might count for some people. (tho was more about buying the good assets to avoid adding even more fire to the crisis, I think investors were mostly wiped out)
deleted 6y ago
[deleted]
hn_throwaway_99 6y ago
The 98 bailout of Long Term Capital Management was pretty legendary - there were books about it: https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1998_bailout https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1... Now, granted, public funds weren't used for the bailout, in this case it was more the Fed organizing private banks for the bailout. Also, the investors in LTCM still lost a ton of money. But LTCM is still a great prototypical example of "vacuuming up nickels in front of a steamroller", i.e. these traders can take these positions (LTCM was focused on merger arbitrage IIRC) that seem like a license to print money, except they invariably can lead to some giant risk blowup. And when they fail, they have a knack for taking down the whole financial system with them so the government has to get involved (even if it is just cajoling other bankers in a room) to bail them out.
- dcolkitt 6y ago
  The point is though there's never been another LTCM in nearly a quarter of a century. LTCM was one of the first major fixed income arbitrage funds, a strategy that's uniquely sensitive to cheap leverage. They were able to exploit their prime brokers to give them tons of leverage at essentially zero costs. Since LTCM was one of the first, the banks didn't really know how to model their counterparty risk and they were dazzled by the prestige. Since that occurred there's been a ton more hedge funds, and banks have way better systems for managing that level of counterparty exposure. Plus the post-GFC regulations severely limit bank leverage anyway, so they couldn't give cheap leverage to their hedge fund clients even if they wanted to. Again that's why we've never seen another LTCM in nearly a quarter of a century. Pointing to LTCM as an example of risk in the financial system of 2021 would be like pointing to Chernobyl as an example of risks in modern nuclear reactors.
  - Gibbon1 6y ago
    > The point is though there's never been another LTCM in nearly a quarter of a century. cough Lehman Brothers went down in 2008.
    - fractionalhare 6y ago

throwaway2007b 6y ago

> institutional investors for always getting the easy money and the bailouts at their expense When was a hedge fund last bailed out with public funds? They typically don't. Like them or not, they have historically been left to fail, or be bought out by their competition.

lilott8 6y ago
While a cursory search appears to prove your point (given the constraint of "public funds"), the fed has bailed out hedge funds [1], I don't remember reading that all. Probably the quietest "bailout" comes from Long Term Capital Management in 1998 was basically bailed out by banks at the urging of the feds[2]. It seems that most funds are left to die [3] (or, more alarmingly, dissolved at the hands at the SEC for insider trading (I'm sensing a trend...)) Perhaps, as "an exercise left to the user", I'll look more deeply at this matter; as it's quite interesting. [1] https://www.nytimes.com/2020/07/23/business/economy/hedge-fund-bailout-dodd-frank.html https://www.nytimes.com/2020/07/23/business/economy/hedge-fu... [2] https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management [3] https://www.investopedia.com/articles/investing/101515/3-biggest-hedge-fund-scandals.asp https://www.investopedia.com/articles/investing/101515/3-big...

smabie 6y ago

I get what you're saying but I don't think I've ever heard professional investors describe generating returns as "easy." Making money at a trading or investment firm is serious work, and no one takes it lightly. Using your example of writing options, market makers who do this are very cognizant and paranoid about the risks involved. However, excess kurtosis and skew (left side tail risk) has definitely wiped out a number of firms, so your point is somewhat valid. I just wanted to point out that when every trader at a firm has their life savings in the company fund, they don't go around slinging YOLO trades. This is serious business, and the vast majority of participants act accordingly (I have met some idiots tho, but most of them went or are going out of business). But it doesn't take that many idiots to cause a lot of mess, so that's another factor to consider.

mgalgs 6y ago
> I don't think I've ever heard professional investors describe generating returns as "easy." Well here ya go: https://youtu.be/VMuEis3byY4 https://youtu.be/VMuEis3byY4 Jim Cramer openly bragging about how easy it was to manipulate the market when he was a hedge fund manager.
- dcolkitt 6y ago
  Jim Cramer is a character on TV. I would take his opinion on finance about as seriously as I'd take Saul Goodman's opinion on the practice of law.
  - imesh 6y ago
    Jim Cramer ran a hedge fund from 1987-2001.
    - joubert 6y ago
      Interesting write-up of the performance of Cramer's investments https://en.wikipedia.org/wiki/Jim_Cramer#Performance_of_Cramer's_investments https://en.wikipedia.org/wiki/Jim_Cramer#Performance_of_Cram...

foldingmoney 6y ago

>Main street (retail investors, taxpayers) have had enough of this, and a lot of anger is directed at institutional investors for always getting the easy money and the bailouts at their expense. They want to see the game applied fairly, such that when the bets go sour, they go bankrupt and don't get bailed out like in 2008. In the 2015 CHF forex crisis, many brokers went bankrupt overnight. That's what should happen to Melvin, and to anyone who takes the stupid risky bets that don't work out. Hedge funds mostly invest client money, not their own. Yes they take pretty hefty fees but they're trying to make money for their clients, who typically are main street.

onlyrealcuzzo 6y ago
Are they? Do many people invest in Hedge Funds with their 401ks? Aren't the vast majority of regular people's 401ks tied up in Index Funds? My understanding was that hedge funds started mostly as a way to be more protective of wealth - i.e. you were sacrificing some potential gains to be more certain you wouldn't lose more than x%. Hedge funds have a lot more focus than that now - but (my understanding at least) is that hedge funds still are mostly for people with high net worths.
- foldingmoney 6y ago
  My understanding is that most hedge funds get the bulk of capital from institutional investors, e.g. pension funds.

dcolkitt 6y ago

> GME's float. When these strategies blow up in their faces, it wipes them out completely, to the level of requiring bailouts. Not a single hedge fund has gone bankrupt from GME, much less gotten a bailout. I can virtually guarantee you that none will. Melvin was down 53%, but still has more assets than they did in the beginning of 2020. They got an external investment from another hedge fund, but that's hardly going bankrupt, and certainly not a bailout. Besides Melvin, not a single other major hedge fund lost more than 20% on Gamestop, let alone went bankrupt.

piva00 6y ago
As far as I know this information isn't public and is based on speculation, no? If not, care to provide some sources and/or data that aren't based on the funds' PR department?