Most of these guys had a wife and kids and just wanted to escape the grind of NYC and were willing to take a pay cut to do so. I was based in our London office but the guys who left our NYC office ended up in university endowments(Pittsburgh)/family offices(1 in Florida and another in Phoenix)/long only shops (Janus Henderson and WAMCO). The most common exit was to a long-only seat in a lower cost of living city. Reputations have been tarnished if not ruined in some cases, and, more crucially, the act of aggressive shorting has faced more scrutiny than ever before, both by regulators and investors such as high net worth individuals and pension funds.įor these reasons, hedge funds will never short the same way again, even if they will continue shorting stocks.I left a USD 4 bn event-driven fund (I focused on credit) back in 2016 so here is what I have seen. Two hedge funds that had relative obscurity (a valuable asset in high finance) are now household names. This doesn’t mean the world of hedge funds has not changed forever. Not many funds were short GME, and some may have gone long GME in recent days.
There is a chance that one or two funds will go bankrupt over this event, but that is quite low.Īnd the chance that hedge funds will end is zero. In short, the only way for a fund to be obliterated by the GME short is if, as a portion of its total portfolio, it is heavily short and either cannot or does not cover that short in a timely fashion.Īre the hedge funds targeted by Wallstreetbets in a position to do this? Outside of the funds themselves, no one really knows (and it is likely that many inside the funds, such as the lower level analysts, don’t even know, either). For those that have a GME short position, if that position is not overly aggressive, it can be mitigated easily during the runup in a variety of ways, such as buying call options, buying the stock itself, or selling puts to create a synthetic long position (these are just a few of many such strategies that could be employed). And almost all hedge funds are net long funds, with some abandoning the practice of shorting or doing it at a very small portion of total AUM in recent years.įor the hedge funds that are net long the market, the GME short squeeze will not and cannot ruin them. Commentators have been ignoring the fact that shorting is often used as a way to hedge long gets on the market or on stocks–hence the term “hedge fund”. That is very unlikely for many reasons, the most importantly that short selling does have an important function in the market of limiting asset bubbles and providing insurance.
One such narrative, which is becoming popular among Wallstreetbets itself is the idea that the GME short squeeze has a moral imperative behind it, and this trade will end the practice of short selling entirely. In part because of the David and Goliath nature of the story and the fascinating mechanics of the story, its human drama and intoxicating life-changing events for investors big and small warrants close scrutiny.īut as narratives form around this event, it is important to not embrace one as the ultimate truth, especially if that narrative is becoming the most popular one around a very complicated and multifaceted tale.
It’s kind of amazing that the Gamestop (GME) short squeeze trade has become the biggest news story in America judging on headlines alone, the Wallstreetbets drama has become a bigger story than the coronavirus vaccine, Biden’s presidency, or the near $2 trillion stimulus plan being prepared.
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