Tag Archives: Hedge funds

Hedge Fund Manager’s Arrest Shows How Market Manipulation Works

Hedge fund manager Neil Phillips has been arrested in Spain this week.

He is charged with masterminding a market manipulation scheme that reached from the UK to Asia. His strategy shows how hedge funds manipulate markets from currencies to stocks.


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From a new report in Bloomberg:

Phillips was charged with conspiring to manipulate the US dollar-South African rand exchange rate in late 2017. The indictment, which was returned in March but previously sealed, describes at least two co-conspirators, raising the possibility of charges against more people.

Neil Phillips

Phillips faces up to 20 years in prison if convicted. His scheme involved buying an option on the dollar-rand exchange rate, then manipulating the exchange rate to make his option pay off:


With the option set to expire, Phillips began making spot trades in an effort to push the exchange rate lower late on Christmas Day, while directing a Singapore-based employee of an unidentified bank to sell $725 million in exchange for more than 9 billion rand, according to prosecutors. That pushed the exchange rate below the barrier, triggering the $20 million option. Phillips collected more than $15.6 million from the deal and also allocated $4.34 million to an unidentified client.

Phillips’ moves show us how market manipulation works.

He took advantage of thin trading late Christmas Day. Markets are easier to manipulate when trading is light.

He also used trades in an underlying asset to benefit an options position. The same approach is likely common in stocks.

Phillips even went as far as involving a co-conspirator on the other side of the world in the hopes of hiding his illegal trades. But he was foolish enough to discuss the whole thing in chat messages on his Bloomberg terminal.

Bloomberg routinely gives chat records to the government in subpoenas. Phillips might not be facing prison had he used an encrypted app like Signal.

I find the Phillips case fascinating for how it trains us to spot hedge fund manipulation of markets.

If we suspect price manipulation, we should look for big trades at odd times. Major sell order right before the close on the last trading day of the year?

It might be worth a look.

Where do you see signs of market manipulation? Leave a comment at the bottom and let me know!

There will be no post on Monday for the holiday. Have a great Labor Day weekend everyone! 👋🥳

More on markets:

AMC Fails to Deliver Pass 700,000 in New Report

Why Hedge Funds May Pile into APE Shares

Is Melvin’s Gabe Plotkin Headed to Prison?

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AMC Fails to Deliver Pass 700,000 in New Report

Note: This is not financial advice.

Fails to deliver in shares of AMC Entertainment Holdings hit massive levels this month.

Failed trades peaked at over 700,000 shares, according to a report out this morning from the SEC. They remained in six figure territory for all but two days in the period, which covers the first half of August.


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This many failed trades is highly unusual for most stocks. Let’s zoom in on August 8th and compare AMC with some of the largest stocks in the market:

Alphabet (Google):: 22

Amazon: 533,744

Apple: 379,843

Microsoft: 0

Tesla: 49,705

AMC: 723,636

Keep in mind, these other companies are dramatically larger. But month after month, little old AMC has far more failed trades.

Fails to deliver can happen for benign reasons, like administrative errors. But why would such errors affect this stock way more than others, time and time again?

The more likely explanation is naked short selling. This involves selling short shares you never actually borrowed.

It’s a powerful weapon to push down a stock’s price.

You don’t have to find any shares to borrow. And you don’t have to pay any interest to borrow them!

This means you can sell short an unlimited number of shares. Awesome, right?

It’s illegal for a hedge fund to do this. But that may not stop them, especially given lax enforcement.

But perhaps the most incredible thing is that 723,636 may understate the number of trades that are failing.

The Depository Trust & Clearing Corporation (DTCC) puts failed trades that don’t resolve for a long period into an “obligation warehouse.” At that point, they essentially disappear.

Earlier this month, over 9 million shares worth of failed trades in AMC stock suddenly vanished.

Maybe the DTCC were busy beavers cleaning it all up. Or maybe they just swept them under the rug.

We won’t know until the DTCC and SEC offer transparency on what happens to failed trades.

Something tells me we’ll be waiting a while.

What do you think of the new SEC report? Leave a comment at the bottom and let me know!

More on markets:

AMC’s 9 Million Missing Shares

Morgan Stanley Investigation Spreads to Multiple Countries

Is Melvin’s Gabe Plotkin Headed to Prison?

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Photo: Melvin Capital founder Gabriel Plotkin

Why Hedge Funds May Pile into APE Shares

Note: This is not financial advice

This morning, new preferred shares of AMC Entertainment Holdings debuted on the New York Stock Exchange.


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Interestingly, the new shares (ticker symbol APE) have the same ownership interest and rights as normal AMC shares. But as I write this, they trade for $5.80, versus $10.52 for AMC shares.

The shares appear ripe for one of Wall Street’s favorite strategies: arbitrage.

If the two share types have the same economic value, they should trade at the same price. Hedge funds often buy an underpriced security while selling short an equivalent higher priced one.

The bet: the two prices will converge.

I expect hedge funds to buy APE shares while shorting AMC common stock. On paper the strategy makes sense, but there’s a little problem…

AMC shares are heavily shorted. 20% of the float has already been sold short.

If hedge funds continue shorting the stock, they become vulnerable to a short squeeze. Huge run-ups in shares of AMC, GameStop Corp. and others have bankrupted hedge funds before, such as Melvin Capital Management.

What’s more, both AMC and APE shares have passionate fanbases that can cause massive volatility. The human factor could cause a seemingly straightforward pairs trade to go very, very wrong.

Hedge funds should heed the lesson of Melvin Capital and avoid shorting volatile meme stocks. But as Benjamin Franklin said:

“Wise men don’t need advice. Fools won’t take it.”

How do you think hedge funds will react to the debut of APE shares? Leave a comment at the bottom and let me know!

More on markets:

AMC’s 9 Million Missing Shares

Is Melvin’s Gabe Plotkin Headed to Prison?

Wall Street Banks Turn on Each Other as Federal Probe Looms

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Is Melvin’s Gabe Plotkin Headed to Prison?

The SEC is investigating Melvin Capital Management for securities fraud. From a report that broke last night in The Wall Street Journal:


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The U.S. Securities and Exchange Commission is looking into Melvin Capital Management risk controls and investor disclosure after the hedge fund was crippled by the meme-stock rally last year, said people familiar with the matter.

The regulator has contacted investors in the hedge fund in recent months as part of an investigation into what Melvin founder Gabriel Plotkin and other senior executives told them following the meme-stock rally in January 2021 and whether it misled investors when it raised money last year.

If Plotkin and other top Melvin executives lied to investors in a fundraising presentation, they committed a very serious crime: securities fraud.

Securities fraud can be punishable by prison time, not to mention large fines. Of course, no one has proven anything yet against Plotkin or anyone at Melvin.

When Melvin raised money last year, it had already suffered massive losses. Its losses during the meme stock rally of January 2021 were $6.8 billion, or more than half its assets.

The worst days saw losses of over $1 billion. A day.

If you’re raising funds and fighting for survival in a situation like that, you might be tempted to stretch the truth.

We don’t yet know which fundraising presentations the SEC is looking into. But we do know that Melvin raised $2.75 billion last year from Citadel and Point72 Asset Management.

Did Melvin lie in those presentations in order to secure the bag?

When you rob mom and pop, it’s hard for the victim to fight back. But if you rob some of the richest and most sophisticated investors in the world, they can hire an army of lawyers to make your life very difficult.

This investigation comes on top of a DOJ probe into Melvin’s short sales. That investigation too could result in prison time for insider trading if wrongdoing is found.

In all, it’s not hard to see why Melvin shut down. It had lost a fortune, couldn’t get any more performance fees, and feds were circling.

I don’t know whether Melvin did anything wrong. But I do know that today, I’m glad I’m not Gabe Plotkin.

Do you think Melvin is guilty? Leave a comment at the bottom and let me know.

Have a great weekend everyone! 👋

More on markets:

Melvin Capital Under Federal Investigation

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

AMC’s 9 Million Missing Shares

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Photo: Melvin Capital founder Gabriel Plotkin

Hedge Fund Giant Tiger Loses Over $18 Billion — Long Fund Down 64%

Note: This is not financial advice.

Hedge fund colossus Tiger Global Management is fighting for its life. Its public stock funds have lost between 50 and 64% this year, vaporizing billions.


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From a report that broke last night in the Financial Times:

Chase Coleman’s hedge fund Tiger Global ended the second quarter nursing heavy losses amid a tech stock rout that has caused performance across one of the world’s largest hedge funds to plummet.

A long-only fund the firm manages ended the second quarter down 63.6 per cent after fees, according to a letter sent to investors seen by the Financial Times, while the firm’s flagship fund ended the first half of the year down 50 per cent after fees.

Tiger’s public stock funds managed $35 billion at the end of last year, per the Financial Times.

This puts the firm’s losses in stocks for the year at a bare minimum of $18 billion. Those losses could be much larger depending on the relative size of the flagship and long-only funds, which is not publicly reported.

This comes in addition to massive losses in private tech startup shares:

A “crossover” strategy fund, which blends Tiger’s publicly traded and privately held investments, shed nearly 37 per cent on a net basis in the first half of 2022.

After huge losses like this, the brutal math sets in. Hedge funds have to make back all of their losses before they can start charging performance fees again.

Hedge funds generally charge a 2% management fee and take 20% of all investment gains. That 20% performance fee is how hedge fund billionaires are made.

Without those juicy fees, it’s hard to keep talent.

Tiger’s long-only fund will have to triple before it can charge a performance fee again. Even if it posts solid 10% annual returns, that will take 11 years.

Even the flagship fund has to double its capital before those fat fees kick in. How many aspiring masters of the universe want to wait that long?

Worse yet, Tiger has cut its management fee to just 1% through December 2023. It also cut its performance fee to just 10% until it not merely makes up all its losses but posts significant gains.

This lack of fees will make it hard to get and keep good people. Why not just jump ship to a fund that isn’t so far underwater, or start your own?

I expect Tiger will close the long-only fund. It’s just too far gone.

As for the flagship fund, perhaps they’ll fight their way back to even with a skeleton crew. I wish them luck — it won’t be easy.

Tiger’s massive losses show the risk of heavily concentrated bets. Going all-in on a single sector with a small number of stocks can result in disaster.

Tiger’s investors would’ve done better to buy a low-fee index fund like the Vanguard ones I own. It’s hard to outsmart the market.

What do you think the future holds for Tiger and other hedge funds? Leave a comment at the bottom and let me know!

More on markets:

AMC’s 9 Million Missing Shares

Wall Street Banks Turn on Each Other as Federal Probe Looms

Investors Pull $28 Billion from Hedge Funds

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AMC’s 9 Million Missing Shares

Trading in shares of AMC Entertainment Holdings Inc. just gets stranger and stranger.

A new report from the SEC shows fails to deliver dropped to 205,675 shares in the first half of July, the latest reporting period. This is down from a high of nearly 9.7 million just two weeks ago.


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So, were exchanges busy little bees cleaning up over 9 million shares worth of failed trades?

Maybe. Or maybe those shares went somewhere else…

The Depository Trust & Clearing Corporation (DTCC) settles most US securities transactions. It has an “obligation warehouse” where it puts failed trades.

Once those failed trades go to the obligation warehouse, they basically cease to exist.

We don’t know for sure if that’s what happened with these 9 million shares because the SEC and DTCC won’t tell us. But given the complexity of settling that many failed trades, I’m willing to bet the DTCC just wiped the slate clean.

So why does this matter?

Allowing huge numbers of trades to fail enables naked short selling. Naked short selling is selling short shares without borrowing them first.

It’s a powerful way to push down a stock’s price. After all, if you don’t have to find shares to borrow, you can short as many shares as you want!

No wonder Compliance Week calls it “one massive embezzlement scheme that for years has mostly gone ignored.”

Why would the DTCC do this? Perhaps because of how it’s funded.

The DTCC makes money by clearing trades and is owned by its users.

Hedge funds are some of its heaviest users.

No wonder the DTCC just sweeps trades under the rug instead of investigating what happened.

The SEC should investigate the pattern of massive fails to deliver in stocks like AMC. And the DTCC must ensure trades are actually completed.

Until then, we’ll continue to see these shenanigans in markets.

What do you think happened to these 9 million shares? Leave a comment at the bottom and let me know!

More on markets:

AMC Fails to Deliver Hit 9.7 Million

How DTCC Makes Fails to Deliver Disappear

Wall Street Banks Turn on Each Other as Federal Probe Looms

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Investors Pull $28 Billion from Hedge Funds

Note: This is not financial advice.

It’s not looking good for hedge funds. Investors pulled nearly $28 billion in the second quarter, disillusioned by poor performance.


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From a new Reuters report:

Amid high volatile [sic] across markets, investors redeemed $27.5 billion of hedge funds between April and June, bringing total withdraws in the first half of the year to $7.7 billion. No hedge fund category lured fresh money from investors in the second quarter.

Total assets ended the second quarter at $3.8 trillion, down roughly 5% from March, [data provider HFR] said, also battered by the funds performance. The fund weighted composite index is down 5.78% in the year, HFR said.

This has been a long time coming. Hedge funds have consistently underperformed the S&P 500.

From Axios:


Why, in the name of all that is holy, do people leave a dime in these things? You can get a Vanguard S&P 500 index fund for 0.04% a year.

I own a bunch of shares in that fund myself. It beats paying a hedge fund 2% of assets and 20% of gains for rotten performance!

One of the most astute investors in the market, the California Public Employees Retirement System (CalPERS), pulled every cent from hedge funds 8 years ago.

But the pension money of far too many hard working Americans is still in these putrid investments.

If the smartest guy at the table just got up and left, why is anyone sticking around?

Hedge funds have an aura about them. Geniuses in glass towers pulling the strings of markets.

But the emperor has no clothes. And to quote Gordon Gekko:

What do you think of hedge funds? Leave a comment at the bottom and let me know.

Have a great weekend everyone!

More on markets:

Wall Street Banks Turn on Each Other as Federal Probe Looms

AMC Fails to Deliver Hit 9.7 Million

Bill Ackman Loses $4.8 Billion

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Photo: “the emperor has no clothes” by nevermindtheend is licensed under CC BY-NC-ND 2.0.

Shorts Having Their Worst Month Since January 2021

Note: This is not financial advice.

Short sellers are having their worst month since January 2021. From a new Bloomberg report:

Somehow, the stock market’s worst first half in five decades has morphed into a slaughterhouse for short sellers.

More big lumps were felt Tuesday, when the S&P 500 rallied 2.8% and bearish traders suffered losses roughly double that.

About 98% of S&P 500 members advanced, the broadest rally since December 2018. The most-hated stocks jumped 5.5%, eventually delivering pain for bears who were forced to cover their positions to limit losses, going by a Goldman Sachs Group Inc. basket. With the most-shorted basket up 16% in July, the month is shaping up to be the worst for short sellers since the retail-driven squeeze in January 2021.


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Heavily shorted stocks have not run like this since meme stocks skyrocketed last January. Indeed, meme stocks are causing some of the biggest pain for shorts right now.

This tussle between the two sides of the investment world has continued this year, and fresh data from S3 Partners, LLC shows that between January and July 2022, AMC short sellers lost more than $1 billion in mark to market losses.

We’re in a bear market. This is not a great time to bet that stocks will go lower.

But hedge funds have piled in anyhow, betting against volatile stocks with cult followings. And again, they’ve taken major losses.

Perhaps some in the hedge fund world are beginning to learn their lesson. I had dinner with a bunch of hedge fund guys last month, and one said:

“Short selling is a great way to lose money.”

Now, short selling hedge funds may be forced to buy stock. They cannot fall too far behind their benchmarks.

Again from Bloomberg:

“Positioning had gotten very defensive as managers were anticipating additional downside. However, if the market rallies, then they are at risk of underperforming the broader market,” Freeman said. “Shorts are hurting their performance and they don’t have enough long exposure to keep up so they are forced to buy.”

Short sellers being forced to buy stocks to stem losses…this is the definition of a short squeeze.

I certainly don’t know if or when any stock will squeeze. But I do know I wouldn’t want to be on the other side of these trades.

What do you think is next for short sellers? Leave a comment at the bottom and let me know!

More on markets:

AMC Fails to Deliver Hit 9.7 Million

Wall Street Banks Turn on Each Other as Federal Probe Looms

New Law Could Put Big Short Sellers on the Endangered Species List

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Photo: “the Great Hedge Fund Hei$t” by eyewashdesign: A. Golden is licensed under CC BY-NC-ND 2.0.

Twilight of the Quick Delivery Startups

Another quick delivery startup is struggling to keep its doors open. Beijing-based Missfresh is fighting huge losses and accounting irregularities.

From a report that broke this weekend in the Financial Times:

Tiger Global-backed grocery delivery start-up Missfresh is fighting to survive as it shuts operations across China, wallows in an accounting scandal and searches for capital to sustain its business.

The upheaval marks a stark turn of fortunes for Missfresh, which pulled in more than $1bn in financing from investors such as Tiger Global and Goldman Sachs and gained a $3bn valuation in New York one year ago. Its market value has now sunk to $88mn.


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Like Gopuff, Gorillas and others, Missfresh opened warehouses of goods across cities. It promised deliveries in 30 minutes or less.

But it’s losing massive sums of money. In fact, management isn’t even sure how bad the losses are:

While Missfresh has been unable to issue audited financials or its annual report for the year to December 31, the company estimated losses last year hit Rmb3.7bn.

Missfresh isn’t the only quick delivery startup getting hammered.

Fridge No More and Buyk both shut down this spring. JOKR exited the US market and Gorillas has done huge layoffs.

Quick delivery is a notoriously difficult business. The costs of opening dark stores, acquiring customers, and paying delivery staff are staggering.

Meanwhile, the competitive market pushes companies to slash prices. The result: terrible margins.

When a startup like Missfresh charges ahead with growth at all costs, the results aren’t pretty. Even massive revenue growth doesn’t matter if the business can never make money.

Remember the old joke:

“We lose money on every sale, but we make it up in volume.”

As an angel investor, I avoid businesses like this.

Quick delivery startups are messy and hard to scale. Meanwhile, high costs and stiff competition mean razor thin margins.

I prefer a pure software business. They’re easier to scale and far more profitable.

For a quick delivery business to succeed, it must have a laser focus on unit economics. Each additional delivery must be profitable.

Otherwise, the company can never make money no matter how many deliveries it does.

Gopuff, the most successful quick delivery company in the US, is laser focused on margins.

Its gross margins, or profit on each additional delivery, are estimated at nearly 50%. That’s significantly higher than Uber’s.

The death of one quick delivery startup after another is great for Gopuff. It removes their competitors!

The carnage in this sector makes me even more attentive to unit economics in my investments. There’s no sense throwing money at business models that just don’t work.

What do you think is the future for quick delivery? Leave a comment at the bottom and let me know!

More on tech:

Did LinkedIn Just Build the Future of Work?

Are You a Venture Scale Business?

How to Write Investor Updates

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Bill Ackman Loses $4.8 Billion

Hedge fund manager Bill Ackman has taken major losses this year. From a new report by Institutional Investor:

Bill Ackman’s Pershing Square Holdings fell 9.5 percent in June and is now down 26 percent for the year, as investors’ fears of recession outweighed concerns about the inflation Ackman has been inveighing against since last fall. 

Pershing Square’s three biggest stock holdings are down more than the market. Through June, Universal Music Group is down almost 23 percent, Lowe’s Companies fell more than 32 percent, and Chipotle Mexican Grill is down 25 percent.


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He is now significantly underperforming both the S&P 500 and the HFRX Global Hedge Fund Index.

Ackman’s fund had $18.48 billion under management at the beginning of the year. This 26% drop means a loss of approximately $4.8 billion.

In addition to his stocks falling, Ackman also made a large bet that short term interest rates would increase. When they fell on recession fears, he took substantial losses.

Ackman is still betting on higher short term rates. This could expose him to further huge losses.

Ackman is predicting 4-5% interest rates, but markets disagree.

Markets expect short term interest to go no higher than 2.5% next year. Ackman is forecasting 4-5%.

Longer-term inflation expectations are also modest. This could mean less need for rate increases.

The 5 Year Breakeven Inflation rate measures inflation expectations over the next five years. Today, it sits at just 2.51%.

Perhaps Ackman will be proven right in time. But as he nurses this big loss, he’d do well to remember these (perhaps apocryphal) words:

“The market can remain irrational longer than you can remain solvent.”

John Maynard Keynes

What do you think of Ackman’s big stumble? Leave a comment at the bottom and let me know.

More on markets:

New Law Could Put Big Short Sellers on the Endangered Species List

AMC Fails to Deliver Pass 2.6 Million in New Report

Why the Stock Market’s Inflation Worries Don’t Make Sense

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Misfits Market

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Photo: Bill Ackman