Hedge Funds Burn $6 Billion In a Month Shorting AMC (and Others)

Several hedge funds that lost a fortune shorting GameStop in January have sustained further losses betting against meme stocks like AMC:

Melvin Capital and Light Street Capital, two US hedge funds hard hit by the January rally in stocks popular with retail investors, suffered further losses in May.

Hedge fund losses from betting against five popular meme stocks — GameStop, Bed Bath & Beyond, AMC, BlackBerry and Clover Health — total about $6bn since the start of May, according to the data firm Ortex Analytics. Peter Hillerberg, Ortex’s co-founder, said funds had recently reduced their short positions in meme stocks but that short interest remained “at very high levels”.

These losses are likely heavily concentrated in AMC, since it outperformed all the other stocks on that list by a wide margin in May, nearly tripling in value.

Hedge funds have been hit so hard that their prime brokers, the banks who fund their trades, are cutting them off:

Wall Street’s top brokers are quietly tightening their rules for who can bet against retail traders’ most-popular meme stocks.

The changes mean some hedge funds and other institutional investors now face higher collateral requirements or are limited from shorting certain stocks, the people said, asking not to be identified discussing internal policy decisions.

Hedge funds have been moving toward options and away from short selling to place their bets against AMC and other meme stocks. But losses from bearish options bets can also be substantial, as Mudrick Capital recently proved. Such trades may not be covered under some of these policies against short selling. Jefferies, however, has wisely included naked option positions (a particularly risky trade) on the list of meme stock bets it will no longer handle.

I have to wonder how long investors in hedge funds will put up with massive losses in volatile stocks, even as index funds post solid returns with minimal fees. If the hedge fund managers guess right on the direction of a highly volatile meme stock, they pocket 20% or more of the gains. If the stock moves against them, it’s the investors who are left holding the bag.

Heads they win, tails you lose.

More on AMC:

Photo: “Hedge Fund” by Paul Robertson is licensed under CC BY-ND 2.0

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