fractionalhare

If a hedge fund went bankrupt, the cash will go to investors who may be risk averse.

If the hedge fund survives it will have significant losses and probably be cagey about deploying a lot of capital again too quickly because it just stared into the face of death.

In the case of individual investors selling off everything, they might be scared because everything is crashing.

There's no rule that says the money will come back to the market quickly. It depends on investor sentiment. Often things have a V-shaped recovery and things are more or less "fine". We had a few of those over the past few years.

But put it to you this way, if this statement of yours:

It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’.

...was correct, then we wouldn't have crashes. But we do. When fear takes over the money doesn't just come back into the market quickly. And then even if it could, it doesn't because second order effects take over. Small businesses close en masse, etc, which magnifies the downturn until it snowballs into a legitimate recession.

I'm not saying a crash will happen because of this. I'm saying it very realistically can happen.

This is compounded by the fact that funds will defensively sell off (or sell short) stable stocks owned by other funds that look like they're about to blow up. If a fund seems like it's circling the drain and it owns 5% of a ticker, other firms are not going to wait for it to implode and move the price down before they liquidate their own positions in that stock.

This market is terrifying.

Well...yeah.

As for the proof about cutting losses - no, there's no proof. You can question every single fact you read about this story in the media if you want. The reasons most people have given for why they would lie about it instead of just do it kind of strain credulity for me. There are a lot of conspiracies being spread around with much regard for whether or not they are true instead of whether they could be true.

No, Citadel does not own Melvin Capital. Melvin Capital received an investment from Citadel (the hedge fund, not the market maker) and Point72 this week.

> Robinhood seems to be manipulating the market to make it easier for Melvin Capital to cut their substantial losses.

Melvin already cut its losses this week, as was widely reported. There is no evidence for the counter claims that they're lying, which themselves originate on reddit. In particular: all the widely cited short interest figures on reddit which purport to show this are out of date (usually by weeks), and even if they were true, they would not be proof the short positions weren't closed.

This doesn't make sense. What analysts are predicting that? Hedge funds are not core infrastructure for the government the way banks are. And individual hedge funds generally manage tens of billions at most.

If this effected a systematic market correction, I could see many hedge funds going under causing a catastrophe for brokers and banks. But I don't see why hedge funds would actually be bailed out by the government.

Yeah I'm not sure GME is exemplifying a new regime of market focus on actual earnings instead of speculation...

I get that hedge funds are categorically unsympathetic characters in this play. But people are so angry that fact checking doesn't seem to matter. It doesn't help that a lot of things financial mechanics are esoteric and not commonly known, or that most people don't know the difference between hedge funds, banks, market makers and brokers.

This is trickier than it might sound, because you are in some sense restricting the rights and capabilities of some subset of the shares. That has valuation implications.

I am not saying it can't be done or even that it's undesirable; just that the mechanics of this are nontrivial to enforce.

I'm not saying reddit is manipulating the market either (maybe! I dunno). Just clarifying this point.

I will add that short interest > 100% is a very common risk measure that firms with a short position actively track.

The parent to your comment describes someone buying a stock from someone who sold it short, and turning around and it selling it short themselves. This happens organically and is not "naked."

Beware the incredible amount of false and misleading information about this situation online. Things catch on in the zeitgeist and don't really get fact checked.

Sorry, I meant you don't need to find a book, you can find the info online.

However if your strategies are well known people typically won't pay you much (if anything) to manage their money, because a bunch of shops will be offering comparable results with the same thing.

Continuing with risk parity: there are walkthroughs of how this works with code and math available online: https://cryptm.org/posts/2020/08/01/parity.html

Note the alpha, beta, volatility and Sharpe measures comparing a straightforward risk parity strategy to SPY.

It's not controversial to anyone in the actual industry that you can beat the market on a risk-adjusted basis. Very often the techniques for doing that are well known and can be levered up to safely beat SPY on a total basis with less overall risk. What's truly difficult (and secret) is beating the market by several standard deviations.

Also, "countless" studies have shown negative correlations between coffee and human health. [1] So which is it? Oh no, it looks like coffee is also positively linked with coronary heart disease and Parkinson's!

This is an area which benefits from more skepticism. Don't write off skepticism in an area filled with reproducibility issues and bad statistics as "denial".

1. https://scholar.google.com/scholar?hl=en&as_sdt=0%2C33&q=cof...

lol. okay. This presents the relationship as if it's a linear function without an upper bound or diminishing return, which seems suspect. I doubt that. [1]

More holistically speaking, let's approach this with some skepticism. Did they control for wealth? Is coffee predominantly consumed by people with better access to healthcare and who can afford better medical treatment? A priori, I would believe that is generally the case.

Maybe they should specifically study the relationship between coffee consumption and prostate cancer in relatively lower income populations that still drink a lot of it, like truckers.

__________

1. Though I would believe their analysis technically indicates it, especially if they only did the bare minimum of statistical work and simply tested for a linear relationship...