What’s going on now is very entertaining.
Some hedge funds and traders are jumping in to join the Reddit/WSB action on the long side. Others are liquidating (or hedging) their shorts which forces them to liquidate (or hedge) their longs. Traders are picking through lists of the stocks most owned long by hedge funds and shorting them, just as others are picking through lists of the stocks shorted by hedge funds and going long them. It’s a dogpile, and fun to watch.
Does it really matter? I have my doubts. First, the stocks that are getting targeted are small, there’s not a lot of market cap being whipped around. Second, this can all get shut down in a second: the dealers can jack up options premia by 5-10X which will choke off the action, the exchanges can halt trading so that options expire worthless, the brokers can raise margin requirements and restrict accounts, the SEC can make any and all of that happen, and the traders who get caught out will have no recourse. The IRS is going to come in for its pound of flesh. And trading with the intent of manipulating stock prices is illegal, not that the SEC will go after thousands of Robinhooders but there are some prominent ringleaders who could be taken out.
My best guess is that when/if this starts threatening the stability or functioning of the market, it will be crushed. No-one really cares if Melvin Capital or other small hedge funds who haven’t been diligent with their risk control go bust, or if a bunch of daytraders give up their profits.
I’ve been checking my portfolio names against lists of hedge funds top longs and shorts, and checking r/WSB for mentions of those names. It’s wasting my time, basically, but nothing more.
Last comment: being very exposed on the short side to a stock that has high short interest is stupid, and every experienced market participant knows it’s stupid. High short interest is actually a “positive” factor in my stock screens (ideally high and starting to decline). No sympathy for the guy who got caught short GME or AMC. If he’s at a hedge fund, he will probably get fired. Most genuine long/short funds will not tolerate a fast drawdown of several percent, they’ll pull capital or terminate the manager in a blink. Those funds are all about risk control. At the same time, no sympathy for the “regular Joe” who loses his retirement savings or the money he needs for his mortgage or college tuition by being a day late to the game. If you can’t take the heat, stay out of the . . .
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