GameStop

norsefox

Grumpy_chap said:

Is the problem deeper than jus this one company?
The hedge funds investors were taking short options on the shop as they identified financial stress and the share value not yet reflecting that.  The Reddit investors haven't done anything to change the underlying position of the company.

BUT, the problem is the way the pensions funds / hedge funds / expert investors take the fee.  Fee is a percentage of fund value, so the professional investors can take massive risks but loose little if the gamble fails to pay off.  They get 0.5% of your £1m fund, so £50k.  If the investor does well, the fund increases to £1.1m - investor gets £55k.  If the investor fouls, then they get 0.5% of the remaining £900k, so £45k.  Big difference to the fund owner, little difference to the professional investor.

The more appropriate reward for the professional investors looking after the funds would be to introduce some mechanism by which they a rewarded a share for growth but receive nowt for losses.  That would not apply to individual trades as the fund fees are only applied either monthly or annually.

On the other hand, the $3 valuation was likely well below its 'fair' value (whatever that means in a market that is so split from fundamentals).

The board changes and the involvement of Ryan Cohen was the only catalyst needed to bring an uplift on an 'artificially' suppressed share price.  The rest is a dogged and loosely-coordinated group of retail investors to drive the share price up, partly due to a belief in the stock's fundamentals, a good amount of 'stick it to the man', and the rest is momentum from retail traders, and 'smart money' seeing an opportunity to drill some short sellers into the ground.

Malthusian

A very good illustration of the fact that when you buy a share long, your downside is limited to the amount invested while your upside is unlimited. While short selling is the other way round - limited upside, unlimited losses.

Short selling is for mugs and people who are gambling with other people's money (i.e. hedge fund managers).

Grumpy_chap said:

The more appropriate reward for the professional investors looking after the funds would be to introduce some mechanism by which they a rewarded a share for growth but receive nowt for losses.  That would not apply to individual trades as the fund fees are only applied either monthly or annually.

Other way round. Performance fees encourage fund managers to bet the farm on risky bets. They gain far more from the fund going to the moon than they lose if the bets don't pay off.

That is why they are mainly seen on status symbol investments like hedge funds, which are a means to relieve rich people of excess wealth.

By contrast with a simple percentage fee, the fund manager loses the same amount from the fund going down that they gain from the fund going up.

HansOndabush

This disproves the 'efficient market thesis' that the share price reflects all known information. Stocks and markets regularly get over and under-valued imho, for a variety of reasons.

AnotherJoe

AlanP_2 said:

123mat123 said:

Surely these aggressive hedge funds are a negative force. So they lose a few billion now and again. Who cares...

Their investors maybe? You know, the likes of pension funds etc.

What pension fund would invest in a hedge fund? 

YellowStarling

HansOndabush said:

This disproves the 'efficient market thesis' that the share price reflects all known information. Stocks and markets regularly get over and under-valued imho, for a variety of reasons.

Unless "all known information" includes awareness/transparency of those funds that are overleveraged in one position or another, or stocks that have enough investors with a certain position, that it makes it a viable opportunity for exploitation and realisation of gains based on things other than the underlying fundamentals of the company or its prospects.

But I get your point - whether the definition of "all known information" is generously extended to include info on possible ways to make gains based on trading practices or not, this is an example of where it would be more readily accepted by many that a company's share price is not 100% based on its buyers and sellers' views on its actual prospects. 

As per my earlier post, this is an issue.  Whether the practice of shorting is something you agree with or not, the degree to which this particular short was allowed to extend (and whether or not the incentives were incorrectly aligned to make this inevitable), it can happen and likely is happening again.  And with the awareness of it being easier, quicker and wider-reaching in the social media age, this either may make it more likely to happen, or more damaging to the efficient market thesis which many may base their faith in the markets on.

TL;DR to my bit:  A market that encourages me to spend my money on companies I don't believe in, for however short a time, to punish trades that have been allowed by the same market to over-extend to above 100% of the float and drive down the price - even if, at a fundamental level, that short was at least based on a prediction about the company's prospects - because I might make more than I would investing in companies I do believe in, is concerning.  I don't blame the retail/WSB/short squeezers - it's the environment that allowed this to be profitable that needs looking at IMO.

Bobziz

Malthusian said:

A very good illustration of the fact that when you buy a share long, your downside is limited to the amount invested while your upside is unlimited. While short selling is the other way round - limited upside, unlimited losses.

Short selling is for mugs and people who are gambling with other people's money (i.e. hedge fund managers).

Grumpy_chap said:

The more appropriate reward for the professional investors looking after the funds would be to introduce some mechanism by which they a rewarded a share for growth but receive nowt for losses.  That would not apply to individual trades as the fund fees are only applied either monthly or annually.

Other way round. Performance fees encourage fund managers to bet the farm on risky bets. They gain far more from the fund going to the moon than they lose if the bets don't pay off.

That is why they are mainly seen on status symbol investments like hedge funds, which are a means to relieve rich people of excess wealth.

By contrast with a simple percentage fee, the fund manager loses the same amount from the fund going down that they gain from the fund going up.

Wasn't Rishi Sunak a partner in a hedge fund management company ? Thank goodness he's not in a position of power now...

Albermarle

AnotherJoe said:

AlanP_2 said:

123mat123 said:

Surely these aggressive hedge funds are a negative force. So they lose a few billion now and again. Who cares...

Their investors maybe? You know, the likes of pension funds etc.

What pension fund would invest in a hedge fund? 

The Standard Life Absolute Return fund, which was a very popular pension investment ( not as popular now) says in its fact sheet that the asset allocation is '100% hedge' . Exactly what that means in practice , I have no idea.

AlanP_2

AnotherJoe said:

AlanP_2 said:

123mat123 said:

Surely these aggressive hedge funds are a negative force. So they lose a few billion now and again. Who cares...

Their investors maybe? You know, the likes of pension funds etc.

What pension fund would invest in a hedge fund? 

I suspect that there are many pension funds across the globe that have a slice of hedge fund investments inside them.

AlanP_2

Albermarle said:

AnotherJoe said:

AlanP_2 said:

123mat123 said:

Surely these aggressive hedge funds are a negative force. So they lose a few billion now and again. Who cares...

Their investors maybe? You know, the likes of pension funds etc.

What pension fund would invest in a hedge fund? 

The Standard Life Absolute Return fund, which was a very popular pension investment ( not as popular now) says in its fact sheet that the asset allocation is '100% hedge' . Exactly what that means in practice , I have no idea.

I was thinking more in terms of institutional funds as opposed to retail but that's a good example. I have some of SLs Global Absolute Return Pension Fund as a slice of their Passive Plus V offering in my AVC.

Croeso69

Terrible ride, not one i fancy ...