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2021 Hedge Fund Contraction

2021 Hedge Fund Contraction is an event that's happening, as of mid-January, 2021.

emsenn's version of the 2021 Hedge Fund Contraction

Here's my brief story of it. This is still happening, from my perspective, so I'll add sources and change it as it happens. None of this constitutes financial advice, and I am not a lawyer1:

  • There's a subcommunity of a Web community that talks about the stock market from the cultural perspective of early 2010s 4chan. It's called /r/WallStreetBets (WSB), on Reddit.
  • In September 2019, /u/DeepFuckingValue (DFV), on WSB, shared that they invested around $50,000 into Gamestop, through long-term equity anticipation securities.2
    • This was seen as an absolutely ridiculous move.3
  • Every month or so since, DFC would post about holding onto his Gamestop securities.
  • After about 10 months, this led folk to look into why DFV was doing this.
    • Turns out, Gamestop might've been a pretty decent company:
      • They had a lot of cash-on-hand
        • More than enough to pay off their debts, in fact!
      • And a fair number of solid assets like stores
  • This led to some other users on WSB investing in Gamestop
  • In September 2020, Ryan Cohen, co-founder of Chewy, bought like 13% of Gamestop's shares4
  • This led to more folk looking at the stock, asking: If Gamestop is solid, why's it valued so low? ($2-4 a share)
  • In September 2020, short interest in Gamestop was at around 140% of total shares.
    • What is "short interest"
      • "Shorting" is when you borrow a stock from someone who owns it and sell it back on the market, because you expect the price to go down.
      • Then you buy the stock back at the lower price, and pocket the difference: profit!
      • (So, 100% of Gamestop's shares were shorted, and then 40% on top of that.)
        • …Which… makes no sense: How can you sell more shares than there are shares?
          • Especially because 75% of Gamestop's stock is held by passive funds and the board and executives!
        • You don't!
        • You wait for the company to go bankrupt, so you don't have to return your shares.
        • That's what DFV figured out! So they bet against the hedge funds, that Gamestop was a fine company.
  • After people noticed all this, Gamestop stock prices went up, from $4 to $8 to $12 from September until the end of October.
  • Then more people started buying in.
  • Which made the prices go up higher.
  • And more people bought in.
  • Eventually, the shorts are supposed to buy back all these stocks. But.. they can't: there are more shares that need to be purchased than there are in the company.
  • This led to the hedge funds buying up the stocks at any price, which pushed the price up higher5
  • Finally, on January 22nd, the gamma squeeze happened
    • That's a very complicated thing but basically it meant that hedge funds had to resolve the shorts, which meant stock prices went up even higher.
  • On Monday the 25th, a bunch of prominent rich people advocated buying into Gamestop stock.
  • On Wednesday the 27th, Melvin Capital almost went bankrupt, but got bailed out by two other funds
  • On Thursday morning, Robinhood, the retail trading app many WSB users use, cancelled pending buys on Gamestop and Blackberry stock and froze the ability to buy stock.
    • Many apps followed suite
    • It was leaked that Robinhood was instructed to freeze it by their owner, a hedge fund… which had bought a bunch of shorts on Gamestop overnight. (Guess they can't help themselves.)
    • Rich people went on the news to complain
    • Alexandria Ocasio-Cortez suggested that Robinhood be investigated
    • A class action lawsuit was opened against Robinhood.
    • Thomas Peterffy (CEO of Interactive Brokers) admitted to closing retail positions6, which is, I'm pretty sure, not legal.
  • On Friday…
    • Clarity Money is closing7; I'd speculate to free up capital for Goldman-Sachs



Give away your money and fuck the law.


citation wanted?


Oh yeah, and while this is happening, users on WSB continue to buy into many other stocks, all of which have been similarly shorted


citation needed

Date: 2021-01-28 Thu 18:28

Author: emsenn

Created: 2021-01-30 Sat 10:43