Hedge Funds’ AMC Death Spiral

Despite losses of nearly $4 billion so far this year shorting stock in AMC Entertainment Holdings, Inc., short sellers are actually increasing their bets against the company:

As AMC tests its key 50-day moving average support level, short bets against the company are increasing, according to data from S3 partners. Over the past week, short bets increased 6% to 5 million shares, worth nearly $200 million.

When a stock is up 17-fold for the year despite a recent correction, and you’ve already taken billions in losses, why would you add to your position? I suspect that some hedge funds, who tend to be large short sellers in AMC, are swinging for the fences because they have little alternative. Many have already taken huge losses, and a few conservative bets won’t bring them back.

Keep in mind the incentive structure for hedge fund managers: they generally make 2% of all assets under management yearly, plus 20% of any gains. That 20% performance fee is what can really make them rich. But, if their fund is down, there’s no performance fee until they’re back in the black.

If only high risk bets can get you back to earning your fat performance fee, you make those bets. Slowly clawing back over a period of years with prudent trades means no performance fees for an extended period, and that’s not palatable to many fund managers. They’d sooner take high risks with their current fund and, if it fails, close it and start fresh with another.

Nice deal for them, not such a nice deal for the pension funds and universities whose money they hold.

If I held a position in any hedge fund that was betting against meme stocks, I’d liquidate it immediately before they lose more and suspend redemptions. The risk here is simply too high and too unpredictable.

There are easier ways to make a buck.

More on AMC:




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Photo: “Danger of Death By Failing” by AlmazUK is licensed under CC BY-NC-SA 2.0


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