Tag Archives: Hedge funds

Hedge Funds Get Special Treatment During Margin Calls

A major feature of the run-up in stocks like AMC has been a battle between short selling hedge funds and bullish retail investors. The small investors have often sensed they’re not being treated fairly.

And when it comes to margin calls, it turns out they’re quite right.

A margin call happens when a trader borrows to fund a trade and the trade moves against him. If he doesn’t post more funds, the broker will close out his trade, whether he likes it or not.

An average investor generally gets two to five days to resolve a margin call. But the rules for the big boys are very different.

According to a new report from Credit Suisse, it gave troubled hedge fund Archegos Capital Management weeks to meet a margin call. The tactic Archegos used to deflect the demands for more cash was incredibly simple: claim they were too busy to respond.

On February 23, 2021, the PSR [Prime Services Risk] analyst covering Archegos reached out to Archegos’s Accounting Manager and asked to speak about dynamic margining. Archegos’s Accounting Manager said he would not have time that day, but could speak the next day. The following day, he again put off the discussion, but agreed to review the proposed framework, which PSR sent over that day. Archegos did not respond to the proposal and, a week-and-a-half later, on March 4, 2021, the PSR analyst followed up to ask whether Archegos “had any thoughts on the proposal.” His contact at Archegos said he “hadn’t had a chance to take a look yet,” but was hoping to look “today or tomorrow.”

No retail investor would ever get away with this. If Robinhood or any other retail broker didn’t get a response in an exact time window, they would liquidate the shares. And the special treatment extended to Archegos here would likely apply to any big client, like Citadel, Melvin Capital, or others.

This gives hedge funds a systematic advantage. They can borrow money and magnify their bets, and if the trades go against them, they can stall indefinitely and hope their position recovers.

All I can tell you is what I do: never buy on margin. Investing is risky enough without adding to the risks with borrowed money. But whatever strategy one chooses, hedge funds and small investors should at least be treated equally.

More on AMC and hedge funds:

EXPLOSIVE CLAIMS IN LAWSUIT AGAINST ROBINHOOD

AMC SHORTS LOST $642 MILLION YESTERDAY

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

Photo: “Bank Robbery In Progress” by foilman is licensed under CC BY-SA 2.0

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

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My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Explosive Claims in Lawsuit Against Robinhood

As it prepares to IPO this week, Robinhood Markets, Inc. is facing several class action lawsuits from its users. Inside those lawsuits, an explosive claim:

High level executives and employees of Robinhood and Citadel Securities were in contact around the time Robinhood restricted trades, according to the complaint.

This lawsuit grows out of buying restrictions that Robinhood imposed on stock in AMC, GameStop, and others this January as their prices skyrocketed:

Retail investors suing Robinhood Market Inc and others over trading restrictions in the wake of a social media-fueled rally that squeezed short sellers have filed complaints seeking potentially billions in damages.

One of the proposed class actions filed on Tuesday in Miami federal court accuses Robinhood and clearing brokerage Apex Clearing Corp of acting negligently in cutting off trades in late January. The other lawsuit alleges they and others were part of an antitrust conspiracy with Citadel Securities LLC to spare the market maker losses on short bets.

Citadel plays an interesting dual role here. Citadel Securities handles many of Robinhood’s trades, but its hedge fund arm invested money in Melvin Capital, a fund that was imploding due to losses shorting meme stocks.

I see two possibilities:

  1. Citadel Securities handles a lot of Robinhood’s trades, so Robinhood naturally talked with them about issues it was facing holding enough money to back trades in volatile stocks like AMC and GameStop.
  2. Citadel tried to influence Robinhood to stop its users from driving up the price of meme stocks, which would hurt its positions in Melvin (and perhaps elsewhere)

I don’t think we have enough information yet to determine which it is. We need to find out what was said in conversations between Citadel Securities and Robinhood, and what contact Citadel Securities staff had with people on the hedge fund side of the firm. The lawsuit will likely expose phone records, e-mails and more that could shed light on what really happened.

That said, we definitely have at least the appearance of impropriety here. Citadel is exposing itself to a huge risk of regulatory crackdown and legal judgments. And Robinhood customers may be skeptical enough that they move on to any of the countless other brokerages available.

Major financial institutions are in the habit of saying “just trust us.” What they don’t understand is that after decades of bailouts and conflicts of interest, that’s a very hard sell.

More on AMC:

AMC SHORTS LOST $642 MILLION YESTERDAY

HEDGE FUND LOSSES COULD TAKE DECADES TO RECOVER

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

Photo: “Fruit of the fireball machine” by SiamEye is licensed under CC BY-NC-ND 2.0

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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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Hedge Fund Losses Could Take Decades to Recover

Melvin Capital, among other hedge funds, has taken severe losses on bad bets in AMC, GameStop and others. They are now down by almost half:

Melvin Capital Management, which lost more than $6 billion in January, is now down 46% for the year through June, the fund recently told investors. Maplelane Capital is down 39% for the period.

Until Melvin recovers all of those losses, it will not earn any performance fees. This juicy 20% fee is what induces traders to set up hedge funds in the first place.

The average long/short equity hedge fund, the class Melvin belongs to, has returned just 3% annually over the last decade. At that rate, it would take Melvin 21 years to recoup its losses.

Here’s what could come next:

  • Manager Gabe Plotkin shuts the fund down, locking in investors’ losses. If he starts over with another fund, he can get performance fees right away.
  • Top traders leave the firm for other hedge funds that are earning performance fees, and hence can pay hefty bonuses. Only the B Team remains.
  • Melvin and similar funds make increasingly risky bets, desperate to quickly recover what they have lost, thereby losing even more. After all, 21 years is a long time to wait.

I think you will soon see more and more hedge funds either shutting down or getting desperate. If I were invested in any fund that saw big losses in meme stocks, I’d sell now before I lose it all.

More on AMC:

AMC SHORTS LOST $642 MILLION YESTERDAY

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

Photo: “Forever is Binding and Freeing” by Lomo-Cam is licensed under CC BY-NC-ND 2.0

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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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

AMC Shorts Lost $642 Million Yesterday

Short sellers in AMC Entertainment Holdings, Inc. got slaughtered yesterday:

Dusaniwsky, managing director at short-selling data provider S3 Partners, told Barron’s he estimates 75.8 million AMC shares are sold short, or roughly 15% of shares available for trading. There has been some covering, as he estimates shares shorted are down by about 4 million over the last week. But with the stock up $8.47 on Tuesday, short sellers were down $642 million in mark-to-market losses on Tuesday alone, bringing the year-to-date losses to $3.82 billion.

AMC surged upward as it consolidated two new theaters into its company and announced discussions with landlords to reopen closed locations.

Short sellers, largely hedge funds, have already lost nearly $4 billion betting against AMC. Their total losses in meme stocks exceed $12 billion.

The only way I can make sense of their stubborn behavior is this: that they’re desperate to recover what they’ve already lost. A gambler who has lost 90% of his life savings in poker may have to keep playing: how else can he 10x his money and get back to where he started? Conservative bets won’t do that.

The only difference is, the hedge funds are playing with someone else’s money.

More on AMC:

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

HEDGE FUNDS’ AMC DEATH SPIRAL

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

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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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

When Citadel Almost Died

Meme stock traders on Reddit and elsewhere love to hate Ken Griffin, CEO of Citadel LLC. The hedge fund and market maker manages over $34 billion and handles more US stock trades than anyone else. Many suspect it had a hand in Robinhood limiting buying in GameStop shares, which angered traders.

Its tentacles are everywhere. Citadel is so big, well-known, and rich it almost seems invincible.

But what’s less well known is that Citadel nearly went bankrupt during the financial crisis of 2008:

…in July 2008, Citadel endured the first of six straight money-losing months. Following his old script, Mr. Griffin raced to buy beaten-down assets such as convertible bonds, long his specialty, only to see them take a further beating.

Griffin’s hedge fund lost 55% of its value, and rumors swirled that the fund was about to go bankrupt. That was a very real possibility: 20% of all hedge funds shut down in 2008-09.

Citadel stopped investors from withdrawing money to stanch the bleeding. It also benefited from a helping hand from regulators, perhaps showing its political influence. From The Wall Street Journal:

In particular, regulators pressed Wall Street firms including Deutsche Bank AG not to make drastic changes in their dealings with Citadel, according to these people.

I suspect that if banks had been left to their own devices, Citadel would’ve imploded under an avalanche of margin calls and severed credit lines. When you’re down 50%, much less 55, people assume you can go down all the way. And they want to cut their losses.

With this governmental helping hand, Citadel managed to survive and today is thriving. But I find this history lesson instructive: the mighty can fall, fast.

More on meme stocks:

SHORT SELLERS LOSE $44 BILLION IN 30 DAYS

AMC ON THE THRESHOLD LIST: STRONG EVIDENCE OF NAKED SHORT SELLING

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

Photo: “R.I.P. Rest In Peace” by Beauteous Babe is licensed under CC BY-NC-ND 2.0

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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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Short Sellers Lose $44 Billion in 30 Days

Short sellers had a disastrous June:

Overall, U.S. short sellers are down -$44.49 billion in net of financing mark-to-market losses over the last thirty days.

The #1 source of short seller losses? AMC, by a wide margin, at $2.8 billion. AMC was also the #2 stock in the entire market in increased short exposure in June, a little behind Tesla, which has a market cap more than 25 times as large.

How can we describe this behavior by short sellers? Delusional? Suicidal? Or perhaps rational, given the incentives hedge funds are facing. Numerous funds are down heavily on bad bets against meme stocks. Once a hedge fund is well into the red, it has to make back its losses to even have a chance of earning its 20% performance fee. (That fee is collected only on gains over the capital invested.)

So, the deeper in the hole a fund gets, the more incentive it may have to make risky bets. Only a huge payoff on a volatile stock (like AMC) can get them back in the black, earning those sweet, sweet performance fees.

Unfortunately, this exposes investors who have already lost much of their capital to enormous risks. If I were an investor in a hedge fund that bet against meme stocks, which fortunately I am not, I’d pull my money out ASAP before they lose it all. It’s hard to make money shorting anything in such a hot market, but shorting one of the most popular stocks out there is a recipe for disaster.

The hedge funds were just lucky that June is a short month.

More on AMC:

HEDGE FUND TORCHED BY AMC

AMC + UFC = JACKPOT

AMC’S S-3 WITHDRAWAL: WHAT DOES IT MEAN?

Photo: “I’m scared too, but we’ll make it.” by qousqous is licensed under CC BY-NC-SA 2.0

If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. This helps more people find the blog! And please leave your comments at the bottom.

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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

AMC on the Threshold List: Strong Evidence of Naked Short Selling

For months, investors in AMC have suspected a conspiracy by hedge funds to drive down the share price via an illegal practice called naked short selling. Strong evidence of this emerged Friday with the listing of AMC on the NYSE’s Threshold Securities list.

Let’s back up: what is naked short selling? In a normal short sale, you borrow the shares and then sell them, agreeing to return them at a later date and hoping the price drops by then, netting you a profit. Naked short selling is selling shares short (betting against the price) that you have not actually borrowed.

Naked short selling is illegal unless it’s a bona fide attempt by a market maker to meet demand. This usually occurs in thinly traded stocks. AMC is the exact opposite, and is often one of the most traded stocks in the market.

Stocks can also wind up on the Threshold List because of fail-to-delivers (trades not being completed) due to administrative errors. But the fail-to-delivers must be substantial: at least 0.5% of all shares outstanding. AMC has been on and off this list for months, along with other meme stocks like GameStop. AMC has high short interest, numerous hedge funds betting against it, and many appearances on the NYSE list. So, I think naked short selling is the likely reason for the fail-to-delivers, not innocent errors.

Naked short selling is illegal because it is a powerful way to push down a stock’s price artificially. If a seller need not even find the shares and borrow them, they can short sell any amount. They could even sell more shares than exist! And no pesky interest to pay on those borrowed shares. Naked short selling is a tool that manipulates stocks and kills investor confidence, the lifeblood of markets that allow companies to raise funds.

So what happens now?

Regulation SHO requires that participants of a registered clearing agency must immediately purchase shares to close out failures to deliver in securities with large and persistent failures to deliver, referred to as “threshold securities,” if the failures to deliver persist for 13 consecutive settlement days.

If hedge funds have to close out their short positions, that involves buying. A lot of it. This could strain the capital of funds that are already nursing wounds from betting against meme stocks, pushing them closer to the edge.

It could also cause another short squeeze, pushing AMC’s price much higher. The stock is up 28-fold so far this year, but it’s possible we ain’t seen nothin’ yet.

More great content on the threshold listing here and here.

More on AMC:

HIGH FREQUENCY TRADERS MAKE BILLIONS ON AMC, MEME STOCKS

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

HEDGE FUNDS’ AMC DOOMSDAY SCENARIO

Photo: “Naked Cowboy” by moneymakermj is licensed under CC BY-NC-SA 2.0

If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. This helps more people find the blog! And please leave your comments at the bottom.

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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Hedge Funds Lose $12 Billion on AMC and GameStop

Hedge funds’ losses on meme stocks have reached staggering levels:

Hedge fund losses since the start of the year from betting against just GameStop, AMC and Bed Bath & Beyond total more than $12bn, according to data group S3, while bets against a number of others have each run up additional losses of hundreds of millions of dollars. More than half short sellers’ $5.1bn of losses betting against AMC this year have come in June.

“In two waves, a few hedge funds have seen modestly sized short positions turn into extinction-level events,” said Andrew Beer, managing member at investment firm Dynamic Beta Investments. Funds that suffer multiple rounds of losses on short bets “will face difficult questions from investors as to whether their risk management failed to adapt to a changed market environment”.

Other short bets haven’t fared much better:

An index compiled by Goldman Sachs of stocks favoured by retail investors has almost doubled since June 2020, while another that tracks companies that are targeted by short sellers has gained 28 per cent.

More here.

Many in the financial industry complain that it’s difficult to know which stock will attract the attention of retail traders next. But watching online message boards is already common practice at Asian funds. There are even some excellent, publicly-available sources that identify the stocks that are most popular on Reddit’s Wallstreetbets, one of the main discussion boards for retail traders.

Swaggy Stocks produces one such chart,which every hedge fund manager should have bookmarked. I would suggest avoiding a bearish position in any stock on this list. A name with moderate interest today could become the most talked about stock tomorrow, leading to a huge price spike. The most dangerous names on this list are those with both high interest and a lot of shares sold short. Those stocks, such as Workhorse Group Inc., are particularly ripe for a short squeeze.

I wonder how long investors will be patient with colossal losses in hedge funds. They are supposed to be the shrewdest players at the poker table. But as the losses mount, they’re no longer looking so smart.

More on AMC and hedge funds:

HEDGE FUNDS’ AMC DOOMSDAY SCENARIO

HOW AMC IS BLOWING UP THE HEDGE FUND INDUSTRY

HEDGE FUND TORCHED BY AMC

Photo: “Police Stationed outside AMC Theater showing Joker film 4573” by Brechtbug is licensed under CC BY-NC-ND 2.0

If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. This helps more people find the blog! And please leave your comments at the bottom.

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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

How AMC Is Blowing Up the Hedge Fund Industry

Yesterday, high profile hedge fund White Square Capital announced plans to close down after big losses in GameStop. New York-based Mudrick Capital just took a massive loss on AMC. Melvin Capital is down by nearly half as AMC, GameStop and others continue to move against them.

These are not isolated events. There is a long term trend toward lower inflows to hedge funds:

This trend is much worse than it seems if you dig into the type of funds that bet against companies like AMC: long/short equity funds. They are the most common type of hedge fund, holding 28% of the industry’s assets.

But this strategy is dying. Long/short equity funds are seeing some of the largest outflows:

No wonder investors are losing patience: such funds have underperformed the market every year since 2011, often substantially:

Indeed, many long/short equity funds were shutting down even before 2021. I suspect those returns will be even worse this year, with high profile blowups in meme stocks.

If you’re a pension fund or college endowment, two types of institutions that often invest in hedge funds, why should you pay their high fees in return for such miserable performance? Hedge funds typically charge 2% of assets every year, plus 20% of any gains. What do I pay for my Vanguard S&P 500 index fund? 0.04% of assets every year, and not a dime of the gains.

Long/short equity funds aren’t providing much real value. What’s their strategy, to short stocks like AMC because they trade above their fundamental value? Everyone knows that. The Reddit crowd’s play is entirely technical: they hope to profit from a short squeeze or gamma squeeze.

Let’s compare this to another form of investing popular with pensions and endowments: venture capital. I invest in startups myself, so it’s a world I’m familiar with. What investors in startups do is entirely different from a long/short equity fund. We have to evaluate obscure, early stage companies with little publicly available information. We have to judge technologies most of the public hasn’t even heard of yet. And we aim to provide a lot more than money: investors often give advice and make key introductions.

Oh, and our money is locked up for about 10 years, versus easy liquidity in stock markets.

That said, even venture capitalists often fail to provide good returns. But here’s the approach I’d recommend for hedge fund investors:

1) Invest in hedge funds that have real performance and a strong value-add, and/or…

2) Invest in index funds, and/or…

3) Invest in something like venture capital, which can add real value

The hedge fund emperor has no clothes. And investors are beginning to wise up.

More on AMC:

Photo: “Fruit of the fireball machine” by SiamEye is licensed under CC BY-NC-ND 2.0

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Fundrise

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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

If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. 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 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.