Demonization of Hedge Funds to Ramp Up

Here we go again

Politicians who printed unlimited money with wild abandon and reckless gambling main streeters will do what they do and avoid accepting any portion of the blame for a breakdown of systems with contributing behavior from all participants. Robinhood blocking the trading is such bad optics but I really doubt they were influenced by hedge funds to do so and more likely that their custodians drove the change.

Both sides want a distraction from the impeachment debate which will fail making both establishment Dems and GOP look bad, they're gonna lop a sweet sweet green shoot in public approval by going after the evil investors.

Of course reasonable arguments could be made about why finance guys did contribute to this or not, but I don't expect a reasonably informed debate. This will become the bipartisan, uninformed bash fest. It's not the bashing that bothers me. It's the completely uninformed nature of it and the fact that it provides cover from ever having to consider how monetary and fiscal policy might have unintended effects.

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Comments (59)

Jan 28, 2021 - 10:29pm

There's someting else that's kind of funny about all this on a deeper level.....

You have to be an accredited investor to invest in a hedge fund. On Robinhoood, you can be a complete moron and throw away your money freely on GME, but don't let investors put their money in a hedge fund, might be too risky you know....

Funniest
Jan 28, 2021 - 10:51pm

I've seen enough shitty finance takes today to last a lifetime. Please make it stop

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Jan 29, 2021 - 7:47am

maybe there's a contagion risk I'm not fully appreciating here, but I don't believe that a chat room going crazy over a few heavily shorted stocks will have tremendously negative impacts for the entire market. I don't see how something like this could be applied to blue chips, the bond market, and so on. I think some regulation will come, but I'd bet this has a far smaller long term impact than the rise of HFT and algo trading.

and I would argue it's not a black swan in terms of what happened (large short squeeze) but it's probably in that category if you consider the source of the short squeeze. by their very definition, black swans are incredibly low probability fat tailed events. this checks the low probability one, but so far no fat tail.

Jan 29, 2021 - 5:42pm

Well, let's think about some of the secondary effects here. We already have an overcapitalized market with rock bottom interest rates and a bunch of institutions that are supporting "main street's" pensions whose cost to hedge just went up. Giving benefit of doubt and assuming no real regulation comes out of this restricting short selling or a hedge fund's cost to operate, why wouldn't funds increase exposure on the long side, thereby perpetuating systemic risk into a pullback?

Not to mention this is a fraudulent company's wet dream...the trifecta of high unsophisticated retail investor participation + incredibly low cost to raise money using equity + inability of investors to short their stock.

When this all comes crashing down, and it will, there will be an unbelievable number of people who lose their entire savings with this type of behaviour -- and we all know it's not going to be the hedge fund manager. But they'll certainly take the blame.

Jan 29, 2021 - 9:02am

This post isn't about complaining about 'our short' getting blown up, it's all those who are not short GME and have watch uninformed tales about hows shorts are evil and malicious and crony criminals, while simultaneously getting blamed for the inevitable pain this will cause when it collapses. It's just a good old speculative mania driven by the Fed, money printing and human nature and greed on all sides.

Jan 29, 2021 - 5:48pm

Honestly I think the most ironic part of all of this is that shorting is one of a very limited number of tools that a market has to push back against fraudulent or structurally impaired but desperate-for-cash companies who would fleece the public in a heartbeat. This includes the short reports that come out of having an incentive to actually publish them. And we not only saw that incentive go away, we saw it be demonized to the point of publishing short sellers disappearing altogether.

People hate Enron, but they also hate one of the only ways to prevent Enron from happening again.

Jan 29, 2021 - 8:41am

If a bunch of redditors online can blow up your strategy / fund, it probably means it was a shitty idea with bad risk management. Never rooting for people to lose their jobs, but the funds losing during this are bad apples and deserved the losses

Jan 29, 2021 - 5:59pm

Are you saying that it was within two sigmas of uncertainty that a business such as GSE would be +2500% on no fundamental news? We can certainly argue the merits of having an unhedged short of GSE given the degree of its SI, or not attempting to cover it immediately when it jumped (again difficult to do with that degree of SI), you don't size positions on the basis of 50 sigma events happening. Yes, having a short has theoretically unlimited risk, but if I build in a 1% chance a stock I short goes to infinity for a scenario analysis, every single stock has poor risk/reward, and if I hedge every short I have on the basis of something like this potentially happening out of the blue I probably go my whole lifetime needlessly underperforming peers on my short performance (in which I'm already at a disadvantage by being anything other than long-only relative to peers in a no-holds-bar, bullish-to-the moon, zero discipline market like we have right now).

Also, I would like to point out the stock going up this much was exacerbated by a squeeze, but these types of violent moves are not impossible to do with low SI stocks provided float is limited.

Feb 2, 2021 - 12:34am

deathTouch

Are you saying that it was within two sigmas of uncertainty that a business such as GSE would be +2500% on no fundamental news? We can certainly argue the merits of having an unhedged short of GSE given the degree of its SI, or not attempting to cover it immediately when it jumped (again difficult to do with that degree of SI), you don't size positions on the basis of 50 sigma events happening. Yes, having a short has theoretically unlimited risk, but if I build in a 1% chance a stock I short goes to infinity for a scenario analysis, every single stock has poor risk/reward, and if I hedge every short I have on the basis of something like this potentially happening out of the blue I probably go my whole lifetime needlessly underperforming peers on my short performance (in which I'm already at a disadvantage by being anything other than long-only relative to peers in a no-holds-bar, bullish-to-the moon, zero discipline market like we have right now).

Also, I would like to point out the stock going up this much was exacerbated by a squeeze, but these types of violent moves are not impossible to do with low SI stocks provided float is limited.

If it happened it wasnt a 50 sigma event in the first place 

Jan 29, 2021 - 8:57am

Agreed, but the rhetoric is not "dumb move by them they deserved to lose money for poor risk mgmt and recklessness". The rhetoric I'm seeing is more along the lines of "they were always evil monstrous criminals destroying lives for laughs and then they made robinhood screw over the little guy, get your pitch forks!" When in reality it's more likely that robinhood was undercapitalized and it was a collateral issue, we'll see

Jan 29, 2021 - 9:48am

I mean how do hedge funds provide value to the world? Maybe you could make the argument that it improves market efficiency (clearly not the case here). Claiming that hedge funds don't exist for the sole purpose of making people stupid rich is asinine. Professional short sellers also have made a living of trying to kill companies and jobs. Not really that crazy to see why people are upset

Jan 29, 2021 - 10:10am

Wirecard. Enron. There's a lot of overlap between the popular narrative today around the shorts in Gamestop, and the narrative Wirecard (and their friends at BaFin / the German investment banks) was pushing before it all collapsed.

This idea that all 'professional short sellers' are evil and trying to kill companies without any social value is pretty frustrating. Can someone explain to me the causal link between shorting a company's shares and that company's fundamentals deteriorating? Most of the time when a hedge fund is short something it's because they think the business is doing a good job of collapsing without any outside help...

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Jan 29, 2021 - 10:15am

The counter argument is that they have made a living doing deep investigative research into frauds such as Wirecard, Valeant, Enron and countless other companies trying to raise capital by lying about what they were doing and taking advantage of the uninformed. There are other short sellers who are reckless and just try to publish 'hit pieces' with little foundation in fact. Almost every shortseller is net neutral or net long the market, they're buying $125 good company and shorting -$25 bad company, which should have the same overall impact to liquidity as shorting $100 of good, but the idea is that it enable productive companies to raise additional capital and fraudulent/misleading/promotional/failing businesses less able to gather more capital that will be destroyed or in some cases (frauds) stolen.

It's not some altruistic heroic endeavor, but I struggle to see why it's necessarily evil - it's a fairly neutral activity, if you're right about the prospects of a company it should be a slight positive for the economy on an aggregate level. If you're going about it maliciously or dishonestly or recklessly it's negative. But hedge funds are in public markets (I can't speak to why robinhood is blocking trades, thats obviously bad). Public markets are transparent and performance driven - unlike defense, parts of healthcare, many private companies who are also profit motivated and id argue much more often to engage in outright cronyism and fraud.

If your point is that they don't 'make' anything, it's a service and not a good. What is the 'value' of a bartender or athlete or accountant or marketer? If a university or a charity can deploy more money towards good causes because they have visibility on their budget and capital that should be a good thing.

Are actuaries evil? Is there service, in aggregate, an important function even if any individual one makes a negligible impact? It pays a lot because it's extremely scalable, that's honestly the crux of it - if 10 accountants could do everyone in the countries taxes, the best performing 10 accountants would be paid a lot and they'd be hired/fired mostly on a performance basis.

There are problems with capitalism, most notably moral hazards and bailouts which is more of a bank/broker issue, but I can see the argument that hedge funds benefit from gov support of banks. Have you ever taken out a loan or have a mortgage? I guess I can see the point that, in the new world the distribution of 'money' is arbitrary and set by government decree then yes, nobody should get paid that much to set prices when prices and value are generally arbitrary. And I think were seeing that shift now, arbitrary companies are going to the moon and people are getting rich from arbitrary 'plays' and in that environment perhaps hedge funds don't serve a purpose, but my guess is the government and random YOLO bets MIGHT create some malinvestment (see NKLA). I guess we'll see

  • Analyst 1 in HF - Other
Jan 29, 2021 - 10:56am

Short sellers exist to make price discovery more efficient, and literally to stop shit like what's happening in gamestop right now where people are pump and dumping a relatively worthless company, such that the average investor could stand to lose a lot of money buying the shares at this point. They also help expose frauds. Characterizing it as making a living killing companies is just completely wrong. It's not like Gamestop was a financially healthy company that the short sellers were trying to screw over on a whim.

Jan 29, 2021 - 9:26am

Sure, we're just people and hedge funds span a wide range personalities, skill-level, ethical standards, like any other job. 
 

My point isn't that hedge funds are altruistic paragons of brilliance. But rather that they're no monolithic cartoon villains and while there are fair bones to pick with the industry, all the current blind hate is just not based in an understanding of markets or the industry - there are a good amount of people on reddit etc. that understand a somewhat nuanced view, but a loud majority of WSB do not (not that they should or that it's wrong of them to not have a deep knowledge of hedge funds nor even that I think the 'shouldn't' buy whatever the fuck they want

But don't buy whatever you want, to an extreme, then the broker runs into a collateral call and suddenly I have to hear politicians tell me it's all my fault. Whatever though, we're overpaid so we get some hate that's fine. But it's the politicians jumping on that annoys me. They're being reckless with printing and policy and I can tell if they know that and don't care, or truly don't understand. I think it's the latter and that's concerning 

Jan 29, 2021 - 9:49am

Again, I offer that you're thinking about this too philosophically. At a basic level, people are rightfully upset about the current situation. It's a zero-sum game, for every winner there is a loser, and the general public is convinced that no matter what they do, they can't win against the financial oligarchy. I would venture to guess that there's probably more truth to that than not. That's the fundamental argument and everything else surrounding it is noise.

What happened yesterday was fundamentally wrong, and if the brokerages were unable to cover their potential losses due to overextending leverage to speculators, they probably shouldn't be in business due to poor risk management. Just like the hedge funds who were on the wrong side of the trade shouldn't be in business due to poor risk management, and the ones caught with their pants down probably won't be for much longer.

You can't just run away from basic truths by always diving into nuances.

  • Associate 3 in HF - EquityHedge
Jan 29, 2021 - 11:04am

Hi there. You might be surprised to find there is more self awareness in the industry than you think. Nothing like going to a sector conference to hammer home how lemming-like most of our industry is - no different from wsb in that regard. I might have met less than 5 people who are truly exceptional intellects. The rest of us just are average smart but grind a lot because we were lucky to get a shot at being financially well off. Like wsb, a small proportion of us go on to become u/DFV but most never do. Most of our incomes are closer to that of the stereotypical wsber yoloing stimmy checks, than we are to our bosses (or even to tech bros for that matter).

This wsb backlash looks to me like trump versus hillary, aoc versus the old fart incumbent she deposed. The pain is real, and even though there might be deeper structural drivers, the mob doesn't consider these nuances because, well, the pain just clouds over everything. That's what happens with rising inequality. You can't amputate someone's leg (economically) and expect them to consider all the subtleties of why they were going to lose that leg anyway. It's happening along two axes, rich versus poor, boomers versus zoomers. Melvin et al tanking hurts both the rich hedgies and the boomers whose pensions were invested there.

The robinhood / citadel thing is likely not criminal because Kenny g is not an idiot and he has good legal counsel that would've told him what not to do. Kenny g is 99% not going to jail. If I am wrong and whistleblowers come out and make that happen... well I guess I'll put an F in the chat for him.

  • Intern in HF - Other
Jan 29, 2021 - 11:08pm

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