fractionalhare

The ones which said they are out are out. There isn't actually any evidence that they stayed in. There is a lot of frenetic speculation on reddit that they're still in, which is mostly the result of redditors cargo culting bad "game theory" to support their own priors that hedge funds will always lie no matter what. I have written many comments about this in the past couple of days; suffice it to say that these conspiracy theories are based in basic trading illiteracy and misunderstood jargon, mixed with a heavy dose of emotional investment.

On the other hand, there is good evidence they actually closed out when they said they did: the hedge funds getting burned when GME was at $50 and $100 simply wouldn't exist anymore when GME hit $300, $400 or $500. They would have been margin called and it would have been game over.

And finally - yes, some funds are short GME right now. But that's not because they were short at $4.5, it's because the current price is dissociated from reality and all the smart money wants to short the peak.

And of course, the risk profile may be different. Equal returns can be more or less appealing depending on the risk profile.

I also wouldn't classify this as high risk. This risk is arguably novel. Short squeezes have happened before, sure, but not with the same sort of trigger. This is probably a new risk signal for the 30 or so funds which were blown out that haven't been as well publicized.

It seems entirely unsurprising to me that a brick and mortar retailer selling digital goods in the middle of a pandemic would be a hot short target for many different funds, thereby organically pushing short interest over 100%.

The liquidity available to retail investors is completely different from the liquidity available to firms with an 11 digit book. Assuming those retail investors actually have a working strategy, they can basically invest in anything.

If they find alpha in trading some overlooked company worth $100M total, they can deploy all their capital and make an outsized return. If a multibillion dollar hedge fund finds alpha in a $100M company, they can make a great return of 50% on let's say...0.1% of their capital, assuming they can buy 10% of that company without meaningfully moving the price against them.

So you have an 11 digit book, and you have to get an outsized return. You either find tons and tons of these little tiny companies you can buy single digit percentages of, or you win on big bets from a blue chips that can absorb your liquidity. Or some mix in between. Or you expand to foreign assets, or another class of asset that can handle the weight you're moving around. But you are fundamentally limited, and whatever you do has a different profile of risk attached to it. You are also bound by the risk thesis of your firm and what your investors' goals are.

That's not to say all hedge funds outperform retail. A lot of them plainly suck and fail to accomplish their mandate. But this is too uncharitable a take; the liquidity and risk characteristics are completely different. It's incomparable.

And those returns are all net of fees.

1. Short interest on GME is still high, even after they claimed to have closed their short position.

2. They have a "huge incentive" to lie about this, because people believe it would encourage a selloff.

That is the entirety of the evidence. It is uncritical despite the fact that it gets frenetically repeated on reddit. Here is the evidence which suggests they didn't lie:

1. That first argument doesn't prove what people believe it does. First, short interest is only officially reported twice monthly, and most cited data is out of date or estimated. More importantly, short interest is an aggregate measure which does not track specific positions. It only tracks all positions together. Other firms which haven't been burned by the price increase have opened new positions, hoping to short from the top tick (or thereabouts).

2. The second argument is reddit cargo culting "game theory", and it violates both logic and Occam's Razor. If you're a fund manager who lies to the public about closing a highly volatile position that could bankrupt you, you are facing securities fraud and violation of fiduciary duty, respectively. Either of those will pierce the veil of your firm and leave your personal assets liable for reclamation by the SEC and/or angry investors. You will be sued. You will lose.

Moreover, the "incentive" of this move is that you might prompt a selloff and get to keep your short position. It strains credulity to think someone would make such an uncertain bet with a huge psychological component when their firm is literally on the line. If you're wrong, your firm is dead and all of your personal assets are up for seizure in the ensuing fallout for the aforementioned reasons.

The alternative is that you just close the position, don't lie about it, and your firm survives and you just have a bad year. You are personally unscathed as the fund manager. And since you've had historically excellent returns and this was a 3 or 4 sigma event, long term you'll probably be fine. You'll have a new signal to incorporate into your portfolio risk management and you'll move on.

The doubt around this situation is uncritical. This is a firm motivated by money. If you're seriously interested in making money, you don't lie to the public about closing your positions (boom, securities fraud) and stay in it when the volatility of the thing has destroyed your thesis (boom, breaking fiduciary duty). You get out to trade another day.

You agree they're motivated by money, right? They would have lost literally all their money, even with the additional investment, if they were still in when GME soared to $400. They would also be aware of that fact.

They would not have survived Monday, Tuesday or Wednesday if they doubled down once instead of closing out, let alone if they did it on every significant increase. Even if you cite the investment from Point72 and Citadel: that's a fraction of what they'd have needed to survive the stock going from $100 to $300+.

If this is your prior for approaching evidence, you're always going to catch big finance lying. But not because you're actually calibrated on evidence. And you won't be able to distinguish between actual fraud and baseless conspiracy.

And interestingly enough, if this transaction occurs in good faith and for unforeseen reasons there is no borrow liquidity at the agreed upon time, a fail to deliver will occur despite the short sale not being naked.

The very page you describe specifically states that you can't infer when failures to deliver occurred because the data is reported in aggregate with no age statistics. [1]

Moreover failures to deliver can occur on both the long and short side, and do not necessarily represent that a naked short sale occurred. [2] And when they are associated with a naked short sale, it may still be legitimate. Market makers are legally allowed to engage in naked short sales to facilitate liquidity, and if they can't fulfill the borrow in time (which would itself happen for legitimate reasons), that failure to deliver would also be reported.

Finally - reporting an increase in apparent naked sales to the SEC by gesturing towards data on the SEC website doesn't make sense. The SEC is definitionally aware of it. There may not be an active investigation, but these kinds of datapulls are pretty manual and staffed by people familiar with the data.

1. https://www.sec.gov/data/foiadocsfailsdatahtm

2. https://www.sec.gov/investor/pubs/regsho.htm

As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010...

> In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.

In this scenario both the short funds and the retail investors are fucked. A select few retail investors and some of the momentum-trading quants do well. But the majority of the money on either side just evaporates - rapidly.

In a more distant but plausible scenario, this hits a bunch of funds across a bunch of tickers, and it goes systemic. They liquidate their longs trying to survive, and when it's not enough it rolls up into their brokers who are left holding the bag.