Reddit Wrecks Hedge Funds

[Shit Good Nose]

Well all this thread has done is made me want Milky Ways and Milky Bars.  Useless.

[chveik]

Here's Captain Tom in a bubble bath to explain

lol

[Pearly-Dewdrops Drops]

It's a funny story, but I'm not sure the David vs. Goliath narrative is entirely correct. /r/wallstreetbets did spark it, but given the volume of trading going on I imagine there are some massive (non-shorting) institutional investors that got in it early and are now reaping profits from the kamikaze reddit investors. So some funds are getting wrecked but others are profiting.

[Huxleys Babkins]

Goliath vs. another Goliath, but in a top hat.

[Pearly-Dewdrops Drops]

Also it seems like reddit's particular ire toward short sellers probably has a lot to do with the Cult of Elon Musk and the fact that firms have frequently tried to short sell Tesla and made him go apoplectic. (Incidentally, Tesla's ponzi-scheme-like current value seems like the other side to this type of internet market manipulation.)

I do enjoy seeing any hedge fund get destroyed though.

[The Dog]

Hedge fund probably has an insurance policy.

That's a bit complicated to explain in simple terms, but basically its like wearing boxers and briefs, just in case.

[The Dog]

If you don't know what pants are, then its a bit like standing on a plastic sheet when you eat soup.

[Gurke and Hare]

So who is the lender of the shares in this instance? GameStop itself?

Pension funds and the like, who don't buy shares for short term gains but look to hold them for the long term, so have no plan to sell them any time soon and are happy to lend them out for a short time. Although I suspect some of them are noticing that the Gamestop shares are vastly overvalued right now and have sold at least some.

[Shoulders?-Stomach!]

So this is concerted action on Reddit driving the share price up, but what's stopping everyone individually tapping out to cash their gains? Are they all anti-hedge fund ideologues driven mad? Like any old gamble, if you'd thrown in £100 only to find that's now worth £500 the urge to call it quits and pocket the cash must cause these things to disintegrate.

[Cuellar]

r/wallstreetbets is an 'interesting' community: they seem to pride themselves on doing stupid things long past the point any sensible person would stop. I would have thought the vast majority of them are doing it for the memes.

And it's all r-word this, and a-word that.

[Shoulders?-Stomach!]

Basically what I'm asking is can I buy £50 of shares in Gamespot and put a deposit on a house by Saturday cheers

[Zetetic]

didn't understand any of that sorry

Bit more straightforward:
https://twitter.com/TikTokInvestors/status/1354480163581534216

[Wonderful Butternut]

Stall already being set out for some Corporate Welfare to get the funds out of this:

https://twitter.com/Street_Insider/status/1354430650154176514

[Gurke and Hare]

Basically what I'm asking is can I buy £50 of shares in Gamespot and put a deposit on a house by Saturday cheers

Maybe, but maybe not - it can't go on for ever. Although it's funny and I'll cheer if some hedge funds go pop, the current price is artificial and doesn't represent the real value of the company. Some people will sell for a profit, but when the selling starts there's a chance that the price will start falling and that could lead to everyone else starting to sell.

[Shoulders?-Stomach!]

Cheers though I presume given it is international news it is already too late and funds will stop agreeing to lend shares to day traders at good value.

[Zetetic]

r/wallstreetbets is an 'interesting' community: they seem to pride themselves on doing stupid things long past the point any sensible person would stop. I would have thought the vast majority of them are doing it for the memes.

And it's all r-word this, and a-word that.

Overwhelmingly 'retards' seems to be used to refer to the community itself, interestingly.

[Zetetic]

A business is about to fail, you borrow a share of that business from an institutional owner and sell it for $10. The stock price drops to $8 a share, you buy one share back and give it to the institutional lender, then pocket the $2 difference. Free money.

Do you actually have to do the bit in bold first?

[Ferris]

Do you actually have to do the bit in bold first?

Yes (as far as I'm aware) but I wasn't a trader so don't know the operational details.

[checkoutgirl]

Nope.

Why did you bother posting that?

[Zetetic]

Yes (as far as I'm aware) but I wasn't a trader so don't know the operational details.

I ask because one of the claims about GME is that at times it has been shorted to an extent that more shares were "sold" by short sellers than actually exist.

My understanding is that you can sell a share at say $10 with the aim of being able to actually buy it $8 in the near future. And if you can't actually buy it then you just "fail-to-deliver".

Which the SEC does discourage, not least because you can short a tonne of stock with the hope of driving the price down by doing so and just walk away if it doesn't work.

[Zetetic]

See naked short selling:
https://www.sec.gov/investor/pubs/regsho.htm

(I've never seen The Big Short. Is this why it's described by someone in a bathtub?)

[Pearly-Dewdrops Drops]

Stall already being set out for some Corporate Welfare to get the funds out of this:

https://twitter.com/Street_Insider/status/1354430650154176514

Keep seeing this retweeted but I presume "bail out" in this context means another infusion of cash from some other equally evil mega investment fund. As Qui Gon Jin once said, "There's always a bigger computer generated fish."

[Ferris]

I ask because one of the claims about GME is that at times it has been shorted to an extent that more shares were "sold" by short sellers than actually exist.

My understanding is that you can sell a share at say $10 with the aim of being able to actually buy it $8 in the near future. And if you can't actually buy it then you just "fail-to-deliver".

Which the SEC does discourage, not least because you can short a tonne of stock with the hope of driving the price down by doing so and just walk away if it doesn't work.

What?! How does that work then, you just say sorry and that's the end of it?

[Ferris]

Keep seeing this retweeted but I presume "bail out" in this context means another infusion of cash from some other equally evil mega investment fund. As Qui Gon Jin once said, "There's always a bigger computer generated fish."

An infusion of capital would only cover increased losses as you're still in the short contract - you'd need to convince investors this is temporary, we promise, and we definitely won't go bust over this because one day the price will decrease.

I'll say this - a $13bn private fund would be considered pretty huge. There are mega capital vehicles out there with orders of magnitude more, but they're pretty rare.

Edit: I'll add the caveat that Zetetic might know more than I do on this.

[idunnosomename]

The Milky Bars are on me!

*white chocolate printer go brrr*

[touchingcloth]

A business is about to fail, you borrow a share of that business from an institutional owner and sell it for $10. The stock price drops to $8 a share, you buy one share back and give it to the institutional lender, then pocket the $2 difference. Free money.

If someone sees you taking a big short position on a stock, they can buy that stock and drive the price up. The share the fund borrowed and sold for $10 is now worth $12 so they'd have to buy that to give back to the institutional lender and eat the $2 loss[nb]if funds get spooked, they can buy shares and eat the loss at the current price if they think the price will keep on rising - theoretically short trades can lead to infinite losses as there is no ceiling to how high stocks can go[/nb]. You're one person though, so how much stock can you buy? It'll have essentially zero effect on stock price so who cares, fill yer boots and lose yer money as the stock price drops.

...but if there are a nebulous collective of people all buying stock, it'll have an actual impact and drive up the price of the stock. Suddenly the fund has to either buy back shares now and eat the loss, or hold on.

The fund won't actually go bust until the initial lender of the shares asks for them back at which point the fund has to buy them back to fulfill the debt at whatever the market price is and oh no we've gone bankrupt. The viral campaign could run out of steam by then, the price drops back to a regular level and the fund survives (or even profits - remember, these are failing businesses and artificially increasing the stock price won't increase the value long term).

It is interesting and will (probably) result in heavy losses for the fund as portfolio managers lose their nerve, but misunderstands how hedge funds operate and they'll probably survive in some form or another for boring esoteric reasons.

I don't get in what sense or to what end you would borrow or be loaned a share as opposed to just buying it. What do you do with it while you've got it before you give it back? It's not like a cup of sugar or a car.

[Gurke and Hare]

See naked short selling:
https://www.sec.gov/investor/pubs/regsho.htm

All that says is that it isn't necessarily a criminal offence. You've still entered into a contract to sell the shares, so if you can't meet the obligation you'd still be liable to some sort of compensation.

Pretty sure there wouldn't be a government bailout of any hedge funds, indeed hedge funds have gone bust before. The reason the banks were bailed out is that the government didn't want the cash machines and everyone's cards to stop working.

[touchingcloth]

Still don't get it.

I watched that The Big Short and I'm sure it's a brilliant film and everything, but it completely lost me (in terms of understanding what the fuck was going on) about 20 minutes in.

I suspect that's why these banks and financial big shots continue to get away with it, cos no one else understands what it all means.

I've seen it several times and read the book, and I'm as lost as you are because it doesn't make any sense, deliberately so.

There's a bit in the film where two fund managers are shorting the housing market, and as it starts to go bust they try to cash in their "insurance" (in the form of the credit default swaps they had bought - the new "product" which was created to allow for shorting the housing market, which historically wasn't possible), but when the mortgage lenders start playing protectionist strategies to mask their losses, the Wall Street banks refuse to pay up on the insurance and there's an interaction where one of the fund managers suggests they sue, and his colleague asks "how? No one understands this stuff!"

Deliberately esoteric vulture capitalist stuff, and all involved should be blown from cannon.

[gib]

Milkybar is all one word. Carry on.

[Zetetic]

What?! How does that work then, you just say sorry and that's the end of it?

I think so - after giving the $10 back, I suppose - but I might be wrong:

so if you can't meet the obligation you'd still be liable to some sort of compensation.

Is this usually anything much more than the refund?

My vague assumption is that the reputational damage of repeatedly failing-to-deliver is meant to be the cost to the would-be short seller.

Edit: I'll add the caveat that Zetetic might know more than I do on this.

Absolutely not! I asked you because I've learnt pretty much anything I've ever learnt on this, this evening...