Interestingly I think they're not entirely incompatible. If the funds can't cover their positions they will attempt to get money from somewhere. This could be loans or selling ownership of the fund, probably to other funds as it looks like has already happened with some. Effectively being forced to put more money in.

Fundamentally the funds made an extremely risky bet and the market is (or was at one point) seemingly reasonably and expectedly betting against it with a short squeeze. The new part is the social hype driving the squeeze via an army of retail investors.

Agree some retail investors are inevitably going to be left with a net loss here, which will suck. But it was (and may still be) a reasonable play when viewing the market as a gambling platform (which the funds were doing by over-shorting).

My hope is that the people claiming to be cashing out their 401k on GME are partaking in anonymous internet hyperbole to fuel the hype and the vast majority are gambling with a few bucks they can afford to gamble with because they can't do anything else right now.