Tag Archives: Wallstreetbets

Retirees Face $1.3 Billion Loss in Wall Street Fraud

It was supposed to be a safe investment.

In small offices across the country, brokers sold a security called L Bonds. The bonds were backed by life insurance policies and were supposed to provide a steady stream of income.

Many buyers were elderly. Now they’re facing catastrophic losses of up to $1.3 billion.

From a report that broke this morning in The Wall Street Journal:

What many of these retail investors didn’t know was that [bond issuer] GWG’s founders and a board director would each use the money to fund and launch their own startup ventures, then move them out of the investors’ reach, according to people familiar with the matter. The roughly 27,000 individuals who bought GWG’s unique debt securities, known as L Bonds, are now facing huge potential losses – for many, their retirement nest eggs.


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The original business buying life insurance policies quickly ran into trouble. So, bond issuer GWG Holdings cast about for another strategy.

It settled on backing speculative startups run by the company’s founders.

That would be reckless enough a thing to do with small savers’ money. But worse yet, the miscreants running GWG quickly moved those assets out of reach of the L Bond buyers.

Once the top executives had taken the assets, they drove GWG into bankruptcy.

The judge overseeing the court proceedings in Houston said he had never before seen a company give up control of everything it owns before seeking chapter 11 protection.

GWG appears to have operated like a Ponzi scheme. Of the $1.26 billion in L Bonds the company sold, nearly two-thirds went to paying off prior bonds.

Meanwhile, the top executives siphoned off tens of millions of dollars in dividends for themselves.

The SEC began investigating GWG as early as 2020. GWG didn’t disclose the investigation to its investors for a year.

In the mean time, it sold another $200 million in toxic L Bonds.

The law generally prohibits the SEC from disclosing investigations. I think it’s high time to change those laws.

Many elderly put their life’s savings into these bonds.

They should’ve known the company was under federal investigation. The government they pay taxes to should never have kept that a secret from them.

It doesn’t help for the SEC to blow the whistle once the money is already gone.

What do you think of this case and how the SEC handled it? Leave a comment at the bottom and let me know.

See you on Monday!

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Hedge Fund Giant D1 Loses $7 Billion in 2022

Shadowy Hedge Fund Cash Bankrolls Fight Against Regulation

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Shadowy Hedge Fund Cash Bankrolls Fight Against Regulation

Hedge funds are going all out to stop the SEC from implementing new disclosure rules. Now they have some help from an academic group whose finances are shrouded in secrecy.

From a report that broke yesterday in Institutional Investor:

…hedge funds aren’t fighting the SEC alone: A new organization, which Institutional Investor has learned has at least one hedge fund backer, has enlisted dozens of academics to argue against the proposals, creating something of a firestorm of criticism.

Wonky academic comments on proposed SEC rule changes typically fly under the radar. But [UC Berkeley law and finance professor Frank] Partnoy made them his mission. Now his work — in comment letters signed by himself, [Robert] Bishop, and other academics — is taking some heat. In part, that’s because the financing of his institute, which pays Partnoy and Bishop for their letter writing, has been shrouded in secrecy.

The International Institute of Law and Finance refuses to disclose its backers. But at least one major hedge fund manager, Bill Ackman of Pershing Square Capital Management, is bankrolling the effort per Institutional Investor.


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Even the group’s chairman is a hedge fund employee:

The chairman of the institute’s board is Stephen Fraidin, a corporate attorney and partner at Cadwalader who has also long worked for Pershing Square.

Given the institute’s lack of financial disclosures, we can only guess who else may be backing its efforts. But we do know that numerous hedge funds, including Citadel, have met with the SEC to oppose new regulations.

So what exactly are these regulations that hedge funds and their friends in academia so passionately oppose?

One requires investors who buy over 5% of a company’s stock to disclose the position sooner. Another requires similar disclosure if the 5% position is in swaps.

Swaps can be used to hide both long and short positions in a stock. They can also lead to sudden, massive losses, as was the case with Archegos Capital Management last year.

Other shareholders should know when the stock they hold is being accumulated by a major investor. Employees too need to know about ownership changes that can affect their livelihood.

Better disclosures could even prevent another financial crisis. If banks know about a fund’s huge swaps positions, they may be unwilling to extend it more credit, which could prevent a huge hedge fund or bank failure.

But just because regulations are good for society as a whole doesn’t mean hedge funds won’t fight them with everything they’ve got. And since the message isn’t that persuasive coming from them, why not pay a few academics to deliver it for them?

Hedge funds are also finding some unlikely allies in Washington, including a Congressman with ties to hedge fund Elliott Management:

Rep. Ritchie Torres, a Democrat from New York’s South Bronx — one of the poorest districts in the nation — whose top donors include Elliott, has been circulating the letter [opposing regulation], according to an individual familiar with the effort. (Torres, whom OpenSecrets says is a top recipient of hedge fund cash in the current election cycle, did not return multiple requests for comment, nor did Elliott.)

Is hedge fund regulation really a top priority of Torres’ constituents in the South Bronx?

Big money has long since poisoned politics and now is doing the same with academia. We, as citizens and investors, need to stop fooling ourselves about who these institutions really represent.

Who else do you think is behind the fight against hedge fund regulations? Leave a comment at the bottom and let me know!

More on markets:

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

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Hedge Fund Giant D1 Loses $7 Billion in 2022

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The End of Celsius — the Beginning of Crypto Regulation

Cryptocurrency lender Celsius Network has stopped all withdrawals, imperiling the savings of 100,000 users. From The Wall Street Journal:

A few months ago, Mike Washburn’s cryptocurrency investment looked like a winner.

Now he’s just hoping to get his money back.

Mr. Washburn, a 35-year-old plumber in Otsego, Minn., had $100,000 in an account at Celsius Network LLC, one of the largest lenders in the cryptocurrency world. Recently widowed, Mr. Washburn said he and his two children moved in with his parents, and he planned to buy a house with his savings. The Celsius account offered him yield higher than would a traditional bank account, and the company was well-known in the crypto community.


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Celsius promised rates of over 18%, versus around 1% in a traditional bank account. Users flocked to the platform, perhaps unaware of the risk compared to a traditional bank.

The assets Celsius holds to pay those high rates plummeted in value as crypto markets crashed this year. And some of its investments are only semiliquid, making it difficult to meet redemption requests from depositors.

Yesterday, certain investors tried to engineer a short squeeze in Celsius tokens.

It caused some run-up in the price, but the tokens remain down over 75% in the last year. I would expect this attempt to fail in the long term, given the overall instability of the Celsius platform.

Source: Coinmarketcap.com

Some savers may have looked at the 18% Celsius was offering, noted that it was 18 times as much as the bank, and piled in. But comparing a crypto lending product to a US bank account is “apples and bowling balls.”


A bank account provides FDIC insurance for up to $250,000. What’s more, any interest is paid in US dollars, a much more stable currency than most crypto tokens.

I think Celsius is finished as a platform.

Any deposit-taking institution operates on trust. Even if it weathers the current storm and manages to stay solvent, who will trust Celsius with their money in the future?

The even greater impact of the Celsius implosion will be on crypto regulation. The industry has often tried to avoid regulation, espousing a libertarian ethos.

That ends when plumbers in Minnesota are losing their life savings. Once their constituents are losing everything and barraging their representatives with phone calls, politicians become motivated to investigate and pass new laws.

What’s more, pols and regulators see opportunities to make names for themselves by sticking it to unsympathetic crypto fat cats.

It may take several years, but expect stiff regulations on cryptocurrency to come out following this crash.

I expect crypto lending and stablecoins to be the first targets for regulation. They are the most similar to the heavily regulated banking industry in that they take deposits and aim for stability.

What do you think is next for Celsius and the crypto market at large? Leave a comment at the bottom and let me know.

More on tech:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Managing a Crisis the Sequoia Way

Why Tech Stocks Are Oversold

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Hedge Fund Giant D1 Loses $7 Billion in 2022

Yet another massive crossover hedge fund is facing serious losses. New York-based D1 Capital Partners has lost approximately $7 billion this year.

From a Bloomberg report that broke yesterday:

…D1 has told investors who selected a 50-50 mix of public and private assets that the strategy lost 23% through May. The firm attributed most of the damage to public investments, which fell 44%. It marked down private assets only 8% — including 0.05% last month.

This 50-50 mix was the most common choice for D1 investors.

D1 still has about $17 billion in private equities and $7 billion in public stocks, implying losses of about $5.5 billion and $1.5 billion respectively. The firm’s total loss for 2022 alone appears to be about $7 billion.


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D1’s losses, large as they are, are probably severely understated.

It has marked down its private company stocks by only 8%. However, the Refinitiv Venture Capital Index is down 47% for the year.

If D1’s portfolio mirrors the broader markets, the real losses on this $17 billion pile of private company stocks could be billions more.

To make things even more interesting, D1 borrowed billions and poured it into illiquid private company shares. From Bloomberg:

Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan Chase & Co. to go even further.

With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio.

Now, the industry is bracing for a reckoning.

I invest in startups myself, but I would never borrow money to do so.

Borrowing money to invest in tech startups is completely reckless. These companies are volatile, speculative, and illiquid.

It’s telling that the best venture capital firms in the business, like Sequoia and Benchmark, don’t play these shell games to boost returns.

Losses for crossover hedge funds like D1 are so severe that some cannot even meet redemption requests from investors:

In the starkest sign yet of the strain on hedge funds, Tiger said last week that it couldn’t continue to fill redemptions the normal way because so much of its portfolio was invested in hard-to-sell stakes in private companies. As the firm saw losses and some redemptions in the first quarter, it exited 83 stocks. Now if investors want to pull money from Tiger’s hedge and long-only funds, a portion of the liquid assets will be sold, but private investments will be placed in a separate account to be cashed out later.

I expect a similar move at D1 soon.

This isn’t the first time D1 has gotten itself into trouble.

According to a report in The Wall Street Journal, it lost 30% of its public portfolio in January 2021. As meme stocks soared, D1 was badly burned by short positions.

The overall impression I have of D1 is of a reckless firm casting about in vain for a winning strategy. It rushed into venture capital with a risky and untested scheme, then lost a fortune betting against volatile meme stocks.

Were I an investor in the firm, I’d be asking for my money back. The question is: can you get it?

What do you think of D1’s losses? And who do you think is next?
Leave a comment at the bottom and let me know!

This is the last blog for this week. There will be no blog next week — I’m heading off for a vacation!

See you on Monday, June 20th. Have a great weekend! 👋

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

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

Citadel Adds Millions to AMC Options Bet

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SEC May End Payment for Order Flow

The SEC may soon propose an end to payment for order flow. This controversial practice lets market makers buy the right to execute trades, particularly those of retail investors.

From a report that broke in The Wall Street Journal last night:

Chairman Gary Gensler directed SEC staff last year to explore ways to make the stock market more efficient for small investors and public companies. While aspects of the effort are in varying stages of development, one idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them, people familiar with the matter said.

The SEC’s proposed trading changes could take effect later this year or in early 2023:

After a year of internal deliberations, the agency has homed in on a narrowing set of proposals. If the SEC votes to release them for public comment later this year, they would have a path to implementation, as Democrats hold a majority of seats on the commission.


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Market makers competing against each other to offer the best price should be much fairer than the current system. Today, large market makers like Citadel Securities can pay brokers like Robinhood Markets for the right to execute trades.

Citadel and other major firms may be dragged kicking and screaming into this fairer market:

A spokesman for Citadel Securities said the firm looks forward to reviewing the SEC’s proposals and working with the agency.

“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency and meaningfully reduced costs for retail investors,” the spokesman added.


Citadel’s spokesman conveniently fails to mention that the firm was fined $22 million by the SEC for not giving investors the best price on their trades.

But in fairness, one study found that payment for order flow has resulted in lower costs. Those payments have let many brokers reduce their commissions to zero.

Despite zero commissions, the price brokers give investors may be so bad that the investor loses in the end.

Brokers claim that payment for order flow trades are being executed at the best available price. But to this day, I’ve never seen a broker release a data set proving it.

An auction model is much more transparent. It could go a long way to restoring retail investors’ confidence in financial markets.

What do you think of payment for order flow? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

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

Credit Suisse May Need Up to $1 Billion After Huge Losses

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Credit Suisse May Need Up to $1 Billion After Huge Losses

Credit Suisse may soon raise over $1 billion in new capital after a string of huge losses last year. From a Reuters report this morning:

Credit Suisse is in the early stages of weighing options to bolster its capital after a string of losses has eroded its financial buffers, two people with knowledge of the matter told Reuters.

The size of the increase would be likely to exceed 1 billion Swiss francs ($1.04 billion), but this has not yet been determined, said one of the people, who declined to be named because the deliberations are still internal.

The cash injection would help Switzerland’s second-biggest bank to recover from billions of losses in 2021 and a series of costly legal headaches.


Credit Suisse lost $5.5 billion last year just in trades with failed hedge fund Archegos Capital Management. It has since closed the prime services business that serviced Archegos and other funds.


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Risk controls have been almost nonexistent at the Zurich-based bank. Big dealmakers have routinely overruled compliance staff, with predictable results.

In my view, Credit Suisse would not be seeking to raise capital in this bear market unless it badly needed it. Stocks are crashing, the IPO market is closed, and bond markets are volatile.

If the Reuters report is accurate, I suspect Credit Suisse is getting desperate.

If Credit Suisse is in a bind, investors are apt to drive a hard bargain. The terms of a financing may be punitive, if it happens at all.

Any new equity financing would also dilute existing shareholders, making their shares worth less. Those shareholders are already reeling from a 37% loss in the last year.

The best way for Credit Suisse to avoid scandals and massive losses in the future is to change its employees incentives. When a banker that brings in a big deal gets a huge bonus and a promotion regardless of how risky the deal is, other bankers take note.

Rather than compensating employees for individual success, Credit Suisse should take a page out of Silicon Valley’s playbook.

Tech companies incentivize employees to work together for the long term success of the business by granting equity. This equity often comes in the form of Restricted Stock Units (RSU’s) that vest over 4 years.

Employees only win if the business as a whole wins. And there’s no incentive to make a reckless deal for a short-term pay-off.

I’ll be closely following any Credit Suisse fundraise. But even billions more in fresh capital won’t change the bank’s dysfunctional culture.

Do you think Credit Suisse is in trouble? And what other financial institutions could be next?

Leave a comment at the bottom and let me know!

More on markets:

This Is Why Credit Suisse Keeps Getting Punched in the Face

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

Citadel Adds Millions to AMC Options Bet

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Hedge Fund Ponzi Scheme Steals $39 Million from Investors

Another day, another hedge fund scandal. The SEC announced charges this week against a Detroit hedge fund for bilking investors of tens of millions of dollars.

From Financial Advisor magazine:

The Securities and Exchange Commission today announced fraud charges against Detroit-based EIA All Weather Alpha Fund Partners I LLC (EIA) and its sole owner, RIA Andrew M. Middlebrooks, for an alleged multiyear Ponzi scheme that the agency said included the misappropriation and loss of nearly $39 million in investor funds.


The commission said in its complaint that from at least mid-2017 to April 2022, EIA and Middlebrooks deceived investors in their hedge fund, the EIA All Weather Alpha Fund I LP, by making false and misleading statements that “wildly” misstated the fund’s performance and total assets. The SEC also said in the complaint that the fund and Middlebrooks provided falsified investor account statements, misrepresented that the fund had an auditor and created and disseminated a fake audit opinion to investors.


In addition to being a rotten trader, Middlebrooks had a taste for the finer things in life. He paid for them with investor money:

Middlebrooks also misappropriated investor funds for personal use, allegedly transferring at least $470,000 to his wife’s business, making more than $750,000 in transfers to his personal bank account and using $64,000 in investor money to pay for jewelry, the agency said.

It seems likely that his victims will lose their entire investment:

“Middlebrook’s losing trading strategy coupled with his misappropriation has resulted in near total loss of investor funds,” the SEC said.


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The hedge fund describes itself rather differently on its website:

We are active investors, not closet indexers, and we have structured an investment process and environment that enables us to be disciplined, to be patient and to exercise good judgment.

It turns out investors would have been far better off with that boring index fund. Indeed, they form the core of my portfolio.

The fund’s LinkedIn profile comes closer to telling the truth:

This intellectual framework allows the Portfolio Manager to manage the Fund unencumbered by emotions or inherent bias.

Emotions definitely didn’t stop Middlebrooks and his cronies from bilking unsuspecting investors.

I was able to find what appears to be the actual slide deck that Middlebrooks used to pitch investors. The scariest part about it is that the pitch seems fairly plausible, proposing a long/short strategy that combines value and momentum.

In addition to their thieving, it appears that EIA partners were paid well. Glassdoor records total compensation of $254,000.

I guess that wasn’t quite enough to cover their expensive tastes.

We see one case of shady behavior after another in the hedge fund world. The SEC and DOJ need to step up and start seriously scrutinizing these funds.

I’m as pro-free enterprise as anyone you’re likely to meet. But fraud doesn’t qualify.

As Memorial Day approaches for those of us in the United States, one of the more patriotic things we can do is to safeguard that free-enterprise system by purging its bad actors.

What do you think will be the next hedge fund to fall? Leave a comment at the bottom and let me know!

There will be no blog on Monday for the holiday. Have a great Memorial Day weekend everyone! 🥳🇺🇸

More on markets:

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

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Citadel Adds Millions to AMC Options Bet

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Photo: EIA Alpha Partners CEO Andrew Middlebrooks

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$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 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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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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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.

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

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