Tremendous

An angel investor's take on life and business

  • $6B Hedge Fund Cut Off from Trading As Investigation Looms

    Hedge fund giant Segantii Capital Management has been cut off from trading by two major banks. From a Financial Times report that broke this morning:

    Bank of America and Citigroup have suspended all equity trading with Segantii Capital Management, due to the banks’ concerns about the hedge fund’s bets on the sale of large blocks of shares, according to several people with knowledge of the matter.

    BoA and Citi may be acting to save themselves from legal liability. Segantii is caught up in a federal probe of short sellers:

    Media reports earlier this year said US authorities had sought communications between Morgan Stanley, which is at the centre of the block trading probe, and a former employee of Segantii.

    The federal investigation centers on block trades. Wall Street traders may have sold short stocks when a large block of shares was about to come onto the market, pushing the price down.

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    These short sellers should not even know about the block trades. But it seems they’re getting the information, likely from someone inside the bank doing the big trade.

    From the Financial Times:

    The SEC probe is looking at whether other traders are getting advance word of these large sales — either directly from the banks or in some other way — and improperly profiting by shorting the shares in expectation that prices will fall.

    So what will happen to Segantii?

    It still has a few banks that will trade with it, including Goldman Sachs. But the federal probe is gathering information on Goldman as well, according to the same Bloomberg report that named Segantii as a subject of the probe.

    Two major banks cutting off Segantii entirely is likely to make the fund toxic, in my view. How will you explain to your boss, or the government, that you kept trading with a fund subject to a federal probe even after other big banks cut them off?

    Segantii may struggle to keep doing business. And bad press spooks investors, which may lead them to pull their money from the fund.

    This could result in a spiral reminiscent of the recent demise of Melvin Capital Management.

    One thing Segantii seems to have in its favor is that it has not notched any huge reported losses. Yet.

    Do you think Segantii is another Melvin? Leave a comment at the bottom and let me know!

    More on markets:

    Hedge Fund Giant Tiger Global Losing $28 Million an Hour

    FBI Raids Short Sellers

    The Real Reasons Melvin Is Shutting Down: No Fat Fees and a Federal Investigation

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    Photo: Segantii chief Simon Sadler

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  • The Autonomous Weapons of the Future…and Present


    A man walks in a remote field. From a place he cannot even see, a quiet drone takes off.

    It’s headed his way.

    This drone was made by Anduril Industries and this time, it just watched. But it can do a lot more.

    These powerful craft can fly at 80 to 100 mph. By comparison, a typical DJI drone can reach about 40 miles per hour.

    The Anduril drone is so fast and durable it can knock other drones out of the sky. The five year old defense startup bills itself as different from the big boys like General Dynamics or Northrop Grumman:

    “Unlike most defence companies, we don’t wait for our customers to tell us what they need. We identify problems, privately fund R&D and sell finished products off the shelf.

    David Goodrich, CEO Anduril Australia & Asia Pacific

    Anduril is taking robot warfare beyond aerial drones. It recently bought a company called Dive Technologies, which makes autonomous submarines.

    What if you had hundreds of even thousands of these autonomous subs patrolling your coast…or even attacking your enemy’s navy right in its own harbors? These relatively cheap and quick to produce vessels could change naval warfare forever.

    Anduril’s drones rely on computer vision and AI to spot threats.

    I’ve actually seen similar technology used by startups that sell security cameras to individuals. In those cases, the system flags a potential intruder for a human to review in real time.

    This type of tech isn’t just being used abroad. It’s in our neighborhoods and also on our southern border, where it’s used to track immigration.

    We’ve had numerous issues with policing of poor communities in America. It concerns me how a new generation of AI and robotics could be trained on those who already have the least.

    As explosive as certain policing incidents have been, what will happen when the unarmed man is confronting a robot?

    But like any new technology, Anduril’s capabilities can also be used for good. The startup is working with NATO forces in Poland, perhaps to prepare them for a Russian threat to Poland stemming from the Ukraine conflict.

    I doubt we can put this genie back in the bottle. But I hope governments and citizens will work together to ensure these powerful technologies are used for good.

    What do you think of Anduril’s tech and how it may be used? Leave a comment at the bottom and let me know.

    More on tech:

    Growing Veggies on Mars

    How Tech Could Stop Wildfires

    The Startup Pitch Checklist

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    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

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  • Talking Startups and Today’s Fundraising Pullback

    Hey everyone! 👋 Hope your Monday is going great.

    I gave a talk at the Starta Accelerator in NYC last week. It was a lot of fun!

    I talk about how the venture capital market works, my investing approach, and today’s pullback in fundraising. And a lot more!

    Here are some interesting parts:

    9:06: When I invest without traction, and David Sack’s latest startup, Callin.

    20:01: How long I take to make a decision to invest

    23:11: Why Jason Calacanis’s syndicate is the best one out there

    29:07: Fundraising in a tougher environment for startups

    34:09: Conspiracy theories on Peloton and Sex and the City’s Mr. Big. 🙂

    41:02: Why investors BS you

    45:21: How I help the startups I invest in

    52:37: Jason’s book Angel and other great books on venture capital and startups

    59:00: Why single founders are sometimes ruled out by investors, and why they shouldn’t be.

    What information here was most useful to you? What did I miss?

    Leave a comment at the bottom and let me know!

    Have a great week!

    More on tech:

    Why Investors BS You

    Inside Today’s Early Stage Venture Market

    The Burn Multiple: What Is It, and What Can It Do for You?

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    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Why Investors BS You

    Ever had a conversation like this?

    Investor: This is an incredible concept! You guys are going to change the world!

    You: Thank you so much! So, how much do you want to invest?

    Investor: Well, actually, I couldn’t get my partners there. But you guys are going to do great! Keep me posted and let me know how I can be helpful.

    You: *Scratches head*

    We investors ply startup founders with big smiles and happy talk. Star fruit, anyone?

    Many founders hear nothing but compliments but come away without a check. Why do investors do this?

    As someone who nodded and smiled at founders for a good long while, allow me to pull back the curtain…

    Preserving Optionality

    Or in plain English, “keeping your options open.”

    Maybe an investor thinks that a startup they meet with is not going to make it. But they could always be wrong.

    Really wrong.

    If the company takes off in a major way, the VC may find himself begging to get into the Series A when he missed the seed round. And if that happens, he doesn’t want the founder angry at him because he was too candid at a meeting 2 years ago.

    Reputation

    As an angel investor or VC, your reputation is everything.

    If I tell a founder the hard truth that his company is burning too much money and may go out of business, he might accept that as constructive criticism. But he might also get very upset with me.

    Founders talk to each other. If that entrepreneur tells two dozen others that I’m a jerk, there goes my deal flow.

    It is in the interests of the founder for the investor to be honest. It can help the founder improve her pitch or fix issues in her business.

    But it’s not in the investor’s interest! He’s more interested in avoiding a hit to his reputation than in helping a struggling founder.

    Tell Them Why Their Baby’s Ugly

    After hearing complaints about happy-talking investors from some of the best founders I know, I’ve changed my approach. When I’m not interested in their company at this time, I’ve started trying to tell founders in a direct but polite way.

    I also try to explain why they don’t meet my criteria for investment and how they might meet it in the future. As noted angel investor Zach Coelius said, “You have to tell them why their baby’s ugly.”

    The Time for Honesty Is Now

    Being honest with founders is especially important right now. The fundraising environment has gotten a lot worse for startups in the last few months.

    Many startups will not survive this. If giving a founder some constructive criticism prevents a business from dying and a bunch of people from losing their jobs, that’s a risk we investors need to take.

    We have to remember why we’re really here: to build the ecosystem and help new companies grow and thrive.

    Please remember this when an investor gives you constructive criticism: she’s actually taking a risk she doesn’t really have to take. Whatever decision you make, at least consider the investor’s ideas.

    What frustrates you about dealing with investors? Leave a comment at the bottom and let me know!

    Have a great weekend everyone! 👋

    More on tech:

    The Burn Multiple: What Is It, and What Can It Do for You?

    Inside Today’s Early Stage Venture Market

    What the Best Founders I Know Have in Common

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    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • The Real Reasons Melvin Is Shutting Down: No Fat Fees and a Federal Investigation

    Melvin Capital Management LP is shutting down, according to a report from Bloomberg that broke last night.

    The once highflying hedge fund was badly burned by short positions in meme stocks like AMC Entertainment Holdings, Inc. and GameStop Corp in 2021. This year, it lost a further 20% of its capital in bad bets.

    Founder Gabe Plotkin sounded positively high-minded in a final note to his investors. From the New York Times:

    Mr. Plotkin wrote to his investors that he had decided that the “appropriate next step” was to liquidate the fund’s assets and return cash to all investors.

    Mr. Plotkin, who founded Melvin in 2014, also wrote that he recognized he needed to “step away from managing external capital.”

    But let’s ignore the sound bites and dig into why Melvin is really shutting down.

    Just last month, Melvin tried to remove a crucial provision in its agreement with investors: the “high-water mark.” This provision only lets the fund earn performance fees if it makes back prior losses.

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    Hedge funds like Melvin usually charge a 2% management fee and 20% of all gains. The management fee pays for offices and staff, but the 20% performance fee is the real prize for hedge fund managers.

    Melvin had lost most of its capital, so it would have to more than double in order to get back to its high-water mark. This would be quite difficult, especially with losses mounting by the day.

    So Melvin made a bold request to investors: remove the high-water mark so we can charge you even more fees to make back the money we lost. Such a move is highly unusual and, predictably, investors balked.

    Facing many years without that juicy performance fee, Plotkin decided to shut down Melvin rather than try honorably to win back the investor money he’d lost. I find this conduct deranged and disgraceful.

    On top of its huge losses, Melvin faces another problem: a federal investigation. The Justice Department is currently scrutinizing its short sales.

    No fat fees and a federal investigation. No wonder Melvin is shutting down.

    But Plotkin could have at least been honest about the real reasons behind his firm’s ignominious end.

    On April 26 on this blog, I predicted that Melvin would shut down. It took just 23 days.

    With major losses stinging funds from Melvin to Tiger and beyond, I suspect Melvin will be just the first of many.

    Who do you think is the next fund to fall? Leave a comment at the bottom and let me know!

    More on markets:

    Melvin Capital Faces Investor Revolt

    Citadel Adds Millions to AMC Options Bet

    Melvin Capital Under Federal Investigation

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    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • The Burn Multiple: What Is It, and What Can It Do for You?

    Today, I want to talk to you about a startup metric you don’t hear much about: the burn multiple. The burn multiple measures how efficiently you’re using your cash to drive growth.

    This number is more important now than it’s been in many years. We are in a more difficult fundraising environment and investors are heavily scrutinizing how companies use cash.

    In the boom times we’ve had for the last couple years, high growth startups could get funded no matter how inefficiently they spent. Shoot, even startups with no revenue or product often raised big rounds!

    Those days are over.

    The NASDAQ is in a bear market, late stage funding is down, and investors are asking themselves not just “Who will thrive?” but “Who will survive?”

    The startups that make it will be those who know how to use money to efficiently drive growth.

    So now that you know why the burn multiple matters, how do you actually calculate it?

    It’s pretty simple. For any period (usually a quarter or a year), divide burn (losses) by new revenue added in that period.

    Burn Multiple:

    Net Burn / Net New Annual Recurring Revenue (ARR)

    Your burn multiple calculation should account for the length of your sales cycle.

    If it takes you around 2-3 months to close a new customer, it’s appropriate to compare burn in Q4 2021 to new ARR in Q1 2022, for example. If your sales cycle is 6 months, compare Q3 2021 to Q1 2022.

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    Now you know what your burn multiple is. But how can you tell if it’s good or bad?

    Use these benchmarks from a superb post by David Sacks, one of the leading SaaS entrepreneurs and investors:

    Burn multiple is especially relevant for SaaS companies with their sticky revenue. Burning cash to get lots of revenue that sticks around makes sense.

    But the burn multiple is still quite relevant for all startups. It helps you understand if the cash you’re burning is actually building your business.

    I recently saw a deal memo for a company that had burned about $1.1 million in a quarter to add just $80,000 of new ARR. That’s a burn multiple of 14.

    A burn multiple like that is an emergency!

    So let’s say you’re that company. What should you do?

    Get that burn down right away! If you can’t show cash efficient growth, it’s going to be hard to raise money right now.

    You’ll want to extend your runway (time before you run out of money) as much as possible. This gives you time to figure out the issues in your business before the cash runs out.

    Another advantage of knowing your burn multiple is that you can share it proactively with prospective investors. Especially if you’re a seed stage company, your awareness of this important metric alone will impress investors.

    Of course, you’ll impress them even more if you can show a good burn multiple!

    I’m writing this because I want to see your company survive and even flourish! But we won’t get there with happy talk alone.

    Calculate your burn multiple regularly and act when it gets out of line.

    What issues are you seeing in today’s fundraising environment? Leave a comment at the bottom and let me know!

    More on tech:

    Inside Today’s Early Stage Venture Market

    What the Best Founders I Know Have in Common

    The Startup Pitch Checklist

    Never miss a post…subscribe!

    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Citadel Adds Millions to AMC Options Bet

    Citadel LLC added tens of millions of dollars to its option bet on AMC Entertainment Holdings, Inc. in the most recent quarter.

    Its net bullish position increased from $90 million to $125 million, according to an SEC report released yesterday. It also built a bullish position in GameStop Corp. options during the period.

    The hedge fund giant held $245 million in call options and $120 million in puts, versus $191 million and $101 million respectively in February.

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    This bullish position is ironic given that Citadel was a major backer of Melvin Capital Management LP. Melvin lost billions shorting AMC, Gamestop Corp., and other meme stocks last year, and may have imploded had Citadel not rescued them.

    Perhaps Citadel’s patience with Melvin’s investing style has run out. Citadel has pulled out most of its $2 billion investment in the failing firm, and began adding to its AMC options position around the same time.

    The SEC report doesn’t specify the strike prices or duration of the options, so we don’t know exactly what Citadel’s strategy is. It could be expecting lower prices in the short term and higher ones in the long term, or vice versa.

    But I find it fascinating that this archvillain of the meme stock saga has capitulated and placed bullish bets on the same companies. It seems Citadel’s losses in Melvin’s hedge fund taught it a lesson.

    What do you think Citadel’s strategy is? Leave a comment at the bottom and let me know!

    More on markets:

    Hedge Fund Giant Tiger Global Losing $28 Million an Hour

    Melvin Capital Faces Investor Revolt

    Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

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    Photo: Citadel LLC CEO Kenneth Griffin

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    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • How Feed Supplements Could Solve Cow Farts and Fix the Planet

    It’s time we acknowledge an uncomfortable truth: everybody burps and farts.

    But amongst all animals, cows are the reigning champions. Those charming emissions contain methane, a potent greenhouse gas.

    Indeed, cows produce more greenhouse gases than Brazil or Germany. But an innovative startup may have found the solution.

    Mootral produces a garlic-based product that farmers can mix into cow feed. It cuts methane emissions by 20 to 38% and boosts milk production by as much as 5%.

    Best of all, it doesn’t hurt the cow or change the flavor of the milk or flesh. Think of it as Beano for cows.

    As far-fetched as it may sound, Mootral’s product is backed by numerous peer reviewed studies. UK farmers can even get the supplement for free if they share their methane data.

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    Mootral isn’t the only startup tackling this pungent problem.

    Blue Ocean Barns has created a seaweed-based supplement that may be even more potent than Mootral. Their product reduced methane emissions by 52% in a recent study.

    A young lady I spoke with recently told me that the world is doomed because of climate change. I couldn’t disagree more.

    Bit by bit, innovative scientists and companies are figuring out this problem. A feed supplement here, a wind turbine over there, and we may soon be amazed at the progress we’ve made.

    What do you think of Mootral and Blue Ocean Barns? And what are the most interesting environmental technologies you’ve seen recently?

    Leave a comment at the bottom and let me know.

    Have a fantastic week everyone!

    More on tech:

    Growing Veggies on Mars

    Coffeebots and the Search for the Perfect Cup

    Male Contraception With an Ultrasound Device?

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    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Venture Capitalists Don’t Invest in Ideas

    A few months back, a very nice young lady contacted me. She had an idea for a software product and wanted me to hear it.

    I had to think of a very polite way of explaining that…

    Venture Capitalists Don’t Invest in Ideas.

    Many people think that angels and VC’s spend their days evaluating ideas. When they find an interesting and original concept, they shake hands and write a big check.

    This isn’t how it works.

    There are countless ideas, but only a skilled and determined founder can turn her concept into a real product. And then it takes even more perseverance to find customers who need the product and get their money.

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    Traction Over Everything

    So rather than attempting to read the tea leaves and find out which idea will work, most investors look for evidence that it’s already working. That evidence is called “traction.”

    If you have several thousand dollars a month in revenue coming in the door, growing 30% month over month, there is clearly a very strong demand for your product. You’ve proven its value in the market.

    If you can show an investor traction like that rather than just a deck or even an MVP, your odds of getting funded skyrocket.

    Why are investors so stingy? Because they know that most startups will never even get to dollar 1 of revenue.

    If investors dump cash on too many companies that don’t succeed in the market, they will soon have no more money left to invest. And then, even the best startups won’t be able to raise capital.

    Venture Capital Is to Help You Scale, Not to Help You Start

    Venture capital is really for scaling a business, not starting one. If you clearly have strong demand for your product in the market, we can help you staff up and meet that demand.

    But few investors, if any, want to give you money to build a product.

    What we’re trying to avoid is a team that raises money, works on the product, but misses their launch date. The date is postponed, and they miss it again.

    Soon, they’re back asking for more money with no real progress to show.

    But What About Pre-Seed?

    Even for pre-seed deals, most investors want to see a Minimum Viable Product (MVP) built. Without that, it’s difficult to tell what you’re even investing in.

    It’s also hard to say if the founders will ever be able to deliver on their plans.

    Even the Best Bring More Than an Idea

    Last year, I got a deal memo in my inbox for Callin, a social audio app co-founded by David Sacks.

    Sacks is part of the famed PayPal Mafia and served as the company’s COO. After that, he founded Yammer and sold it to Microsoft for $1.2 billion in 2012.

    He has a stronger track record than almost anyone. But even he didn’t show up with just an idea.

    Sacks and his team had a nicely functioning app in private beta available for iOS. Numerous users were already creating podcasts on the platform.

    Alas, the round was massively oversubscribed and I never got my allocation. But I did come away with an interesting lesson.

    Wrap-Up

    If you want to raise money, show up with more than an idea. Show up with an MVP you can show investors.

    Better yet, come with a couple of customers and a little money coming in the door. Nothing impresses investors like real customers and real revenue.

    Building an MVP with minimal resources and finding customers on your own is very hard. But so is contacting investor after investor with little chance of success.

    What misconceptions have you seen about fundraising? What still mystifies you about the process?

    Leave a comment at the bottom and let me know!

    Have a wonderful weekend everyone! 👋

    More on tech:

    Inside Today’s Early Stage Venture Market

    What the Best Founders I Know Have in Common

    Amp It Up

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    Photo: “Startup” by Skley is marked with CC BY-ND 2.0.

    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Move to T+1 Trade Settlement Could Crush Short Sellers

    US markets will soon move to faster settlement of trades. This change could seriously damage some short selling hedge funds.

    From a new report in The Trade News:

    The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) are working together to reduce the T+2 settlement cycle in the United States to T+1 by the first half of 2024.

    This could quickly lead to regulators requiring that trades settle same day, or T+0, according to a Deutsche Bank report. Faster settlement could have two disastrous effects on short sellers:

    Naked Short Selling Gets Harder

    Some hedge funds sell short shares without ever borrowing them first. This mostly illegal practice shows up in huge, persistent fails to deliver in volatile meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc.

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    If trades have to settle faster, it will be harder to sell short shares you don’t own while possibly locating some shares later. You have less time for your incomplete trade to sit in limbo.

    Without this powerful tool to push down stock prices, it will be more difficult for short sellers to tank a stock.

    Brokers Are Less Likely to Suspend Trades in Volatile Stocks

    Last January, Robinhood Markets Inc. and other brokers stopped users from buying shares of volatile meme stocks like GameStop and AMC. Their rationale was that given how much the stocks’ prices were moving, they couldn’t afford to put up the necessary margin to process the trades.

    After buy orders were stopped, GameStop stock plummeted:

    Brokers like Robinhood have to post money with clearinghouses such as the National Securities Clearing Corporation (NSCC). The more volatile a stock and the longer it takes to settle the trade, the more money they have to cough up.

    If the time it takes for a trade to settle is cut in half, the amount of margin brokers would have to post would likely be cut in half as well. Indeed, reducing margin requirements is one of the main reasons why regulators want to move to T+1 settlement.

    Where This Leaves Short Sellers

    Short sellers in recent years have had a lot of advantages.

    Loose trade settlement rules made naked shorting easier. And if that failed, brokerages might bail you out by stopping retail traders from buying the stock to squeeze you!

    And even with these advantages, hedge funds like Melvin Capital lost billions on their short positions. How big would the hole have been without these tailwinds?

    The Loophole

    There is one good piece of news for shorts: there may be a loophole. SIFMA, a Wall Street Lobby, is seeing to that:

    …SIFMA requests an exemption from SEC Rule 15c6-1 for security-based swaps, which are generally bilateral and executory in nature.

    This would make swaps exempt from the faster settlement rules. Hedge funds like Archegos have already used these derivative contracts to make massive bets out of the public eye.

    If the move to T+1 settlement makes short selling harder, I expect more funds to move into swaps to avoid the rules. I encourage the SEC to find a way to make T+1 apply to swaps transactions as well.

    The future is looking darker for short selling hedge funds. The question is, will regulators create a more efficient market for everyone, or let lobbyists pick apart their work piece by piece?

    What do you think new settlement rules will mean for short sellers? Leave a comment at the bottom and let me know!

    More on markets:

    Hedge Fund Giant Tiger Global Losing $28 Million an Hour

    Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

    Archegos Used Swaps to Hide Positions; Other Funds Are Too

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    Photo: Prominent short seller Gabriel Plotkin, founder of Melvin Capital

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