NOT. FINANCIAL. ADVICE.
(Some disclosure: In my job, I heavily service asset management firms and hedge funds. So I have some knowledge of how they operate, and have interacted with many fund managers over the years.)
The question in the title above is one of the big things on my mind for months now, as I am sure it would be for many of you Apes too! The reason being that all the DD on these and other related sites, points to it being preposterous that there is any mathematical hope for GME shorts to exit the trade cleanly now.
Self-Destroying Behaviour
And yet, for months now, we have seen the short hedge funds double down on their postions, at any and all opportunities. That is, take even more short positions than before, when all the Apes’ research is pointing to this being an absurd strategy. Which got me thinking as to why? Is there something we are missing? Could they have a legitimate bull case for continuing to short?
I think there have been a few Apes that have tried to find technical reasons for them continuing with this strategy. Yes, there does indeed seem to be so much fuckery and rule bending, that there are few immediate penalties for taking more short positions. But what I can conclude from reading the relevant DD, is that the fuckery is to slow down the MOASS from happening, but not prevent it.
Please correct me if I am wrong, but I have not seen any findings yet that point to the fuckery actually preventing the MOASS altogether. And certainly not pointing to them actually winning the bet! So from what I have learned, all these under-handed actions we have seen taking place since January appear to be delaying the inevitable. And yet…everything points to the short sellers having still doubled down. Why would they continue such a reckless approach???
Non-financial reasons for continuing with the madness
As I wasn’t satisfied with the technical DD attempted to answer this question, I decided to do some research on the minds of short sellers. There is a certain Reddit sub that is a forum for, specifically, those shorting GME. As entertaining as it may be, retail shorts are a tiny fraction of the overall shorts, so I don’t feel very reflective of the psychology of financial institutional short sellers. They make up maybe 99% of the other side of this bet, so it is their psychology that interests me.
So I decided to do some digging around, to see if there are any accounts from “professional” short sellers, especially on their experience of being on the losing side of a bet. As you can probably imagine, very difficult to come by such information – naturally, most of these “losers” have not left many records of what such a fearful, desperate and soul-crushing experience it must have felt like. But I did find one brief account, but which had some rich detail and gives some good insights, I feel.
Second hand account by Laurent Bernut of the Volkswagen short squeeze in 2008
This account of the most famous of short squeezes so far, is from this hedge fund portfolio manager:
He was working for Fidelity in Japan in 2008, when the Volkswagen short squeeze occurred. (Note to US Apes: This is not the same Fidelity that many of you use as a broker to buy GME stock these days. This is their sister company – but operationally fully independent – Fidelity International. They are headquartered in London, and are essentially: Fidelity excluding the USA.) Laurent now appears to be CEO of his own hedge fund:
http://alphasecurecapital.com/about-us/
He additionally seems to have quite a presence on Quora, to which he contributes a lot. In a post on that forum a few years ago, he gave a personal account of the Volkswagen squeeze, regarding one of the other fund managers who had taken a short position. I think you Apes may find his account interesting, to understand how the GME shorts could have got to where they are now:
Transcript from Qoura of his account
“One of my colleagues in Europe was short the stock. That stubborn genius refused to cover and even doubled down. That was when risk managers, i did not even know such creatures were breathing the same air, failed to appreciate the joke, closed the position and made sure this would never happen again, ever.
Meanwhile, back at the ranch, we were peacefully printing $5–20 M tickets in Japan, business as usual, when compliance suddenly rained down upon us. After some parlay, we finally got the reason why we officially became overnight outlaws. The recent blow-up had made jurisprudence. The maximum notional we were then allowed to go short on was reduced to $3 million. good luck with that! That would be about 120–150 names, just to meet the mandatory minimum net exposure. (Shortly thereafter we found a loophole that enabled the options bazooka)
But that is not the end of it. That idiot was not fired. He managed to get promoted. He even got a pilot fund which he of course splendidly torpedoed. He was hoarding gold like he was about to bring the Sterling back to the Gold standard. He then escaped before he got fired. Don’t know where he is hemorrhaging money now, although i did see him at a CLSA conference in Hong Kong a few years ago, embarrassing silence… I remember how overconfident and condescending that twat was, comparing himself with investing legends. Well, maybe one day he may have a chance at posterity if his disgruntled investors ever gather together and offer him a commemorative plaque somewhere down at the bottom of a public urinal.
PS: I am breaking a rule of the industry, always be nice, but frankly nothing reviles me more than those who willfully immolate other people’s money to shore up their fragile ego. This is people’s hard earned life savings we are talking about. This demands respect and commands our humility. I do believe in integrity and if ever he hears this, fine, pistols at dawn or bare knuckles.”
Some take-aways from this account
It is, of course, only one person writing about one short sellet in one short squeeze only. But several interesting points that Laurent Bernut shared:
- “That stubborn genius refused to cover and even doubled down.” —> Clearly he thinks his short-selling colleague refused to accept he had made an error. And instead of trying to cut his losses, stubbornness and perhaps pride fuelled him to keep making the same error. It’s almost as if this fund manager was refusing to accept reality i.e. there was no way he could be wrong, and he would show others that he cannot be wrong, by taking an even bigger short position!
- “That was when risk managers, i did not even know such creatures were breathing the same air” —> A complete disregard of the importance of an asset management firm’s risk team, shown here by Laurent. He compares this function and its members to being sub-human, and not worthy of even breathing the same air as he and other investment decision-makers. These risk management teams (covering trading risk, operational risk, collateral risk etc.) are of course critical for any financial institution to ensure they do not over-stretch themselves.
- “failed to appreciate the joke” —> Interesting choice of words used to describe the doubling down on the short position. I don’t know if Laurent himself is making a joke here, but implying that his colleague was playing around with Fidelity’s money (of course, their clients’ money) very casually i.e. almost like Monopoly money.
- “risk managers…closed the position” —> Fidelity’s risk management team had stepped in and eventuality forced the short position to be closed. They are of course one of the more reputable asset/mutual fund managers, following more strict risk management principles than most other companies in the industry (and certainly much stricter than most long/short hedge funds). It is not a big stretch of the imagination to think that, at some of the more aggressive hedge funds, the internal power dynamics mean risk management teams cannot easily do their jobs. Which could mean the fund managers and traders are able to act quite freely, and keep taking riskier and riskier positions without an internal mechanism to reduce or redact this…
- “made sure this would never happen again, ever” —> Not sure if Laurent is referring here to Fidelity International only, in which case he may have a point i.e. they do have stronger risk management policies than most. But if he is remarking in a more general sense, then clearly this is not the case as here we are with GM! Although the most risky types of hedging/short selling did go down in the few years after 2008…they appear to have made a spectacular comeback in recent years.
- “we were peacefully printing $5–20 M tickets in Japan, business as usual, when compliance suddenly rained down upon us” —> Here Laurent is alluding to his own short position taking, which appears to have been extremely successful with at that time i.e. the equivalent of printing money, in his eyes. However, with a high level of risk involved, which Fidelity’s compliance division had stepped in to try and halt from then as a result. (Note: Risk teams try to prevent bad stuff from happening, Compliance step in to investigate when suspecting the bad stuff is already happening or happened.)
- “The maximum notional we were then allowed to go short on was reduced to $3 million. good luck with that!” —> Fidelity seemed to have imposed a severe restriction on how large the short positions their fund managers could take. Which Laurent appears to be saying their investing teams had a mind to completely ignore, if possible.
- “Shortly thereafter we found a loophole that enabled the options bazooka” —> They appear to have been successful in finding a loophole. That being: options….
- “But that is not the end of it. That idiot was not fired. He managed to get promoted. He even got a pilot fund” —> Clearly the bad bet placed by Laurent’s colleague on shorting Volkswagen, did not do much damage for their career progression prospects. Again, keep in mind what I wrote earlier about Fidelity International being one of the more reputable and certainly less aggressive asset management firms out there. I can certainly imagine at actual hedge funds, nine bad bets made by a fund manager could be forgotten, if they win spectacularly on the tenth throw of the dice. (With each of those throws of the dice having the potential to bring the house down…)
- “He even got a pilot fund which he of course splendidly torpedoed. He was hoarding gold like he was about to bring the Sterling back to the Gold standard. He then escaped before he got fired.” —> Gold had a huge bull run in the years after 2008…so I am not sure how this fund manager failed! Potentially by hoarding the gold as collateral for taking some very risky short positions on other asset classes. And those short trades failing badly, which means even having the gold was not enough.
- “Don’t know where he is hemorrhaging money now, although i did see him at a CLSA conference in Hong Kong a few years ago,” —> This fund manager seems to have kept making the same greed-fuelled errors in judgement, and kept failing at his job i.e. to enhance the wealth of the clients whose money he would have been responsible for. Sounds like he moved onto the French/Hong Kong firm CLSA after Fidelity, so able to move around within the industry without the poor short selling track record being much of a hindrance to his career progress.
- “I remember how overconfident and condescending that twat was, comparing himself with investing legends.” —> The refusal to accept his shortcomings and past failures, could be the reason for why this guy could keep making the same plays over and over again. And his over-confident demeanor might allow him to keep his bosses sweet, or keep finding new employers, even after all these failures. Purely speculation on my part, of course, but this scenario seems plausible to me given the types of personalities within the industry.
- “nothing reviles me more than those who willfully immolate other people’s money to shore up their fragile ego” —> Keep in mind that Laurent does not come off as a saint in this account either! But he is making an important point here, about how some powerful figures at financial institutions appear not to be thinking about what their actual jobs are for i.e. to serve their clients. And instead to be taking actions that play to their own egos, and attempting to serve no-one but themselves.
- “This is people’s hard earned life savings we are talking about. This demands respect and commands our humility.” —> You said it, Laurent! I wonder what Citadel’s clients will be thinking about their decision to hand over their money, when that pack of cards suddenly falls. No doubt some will sadly be losing their life savings in this mess.
Summary
This is of course one account by one fund manager, that too just a brief write-up on Quora. But it did provide a fascinating insight to me, on how the GME short-sellers could have come to the cliff-edge they are now at. No doubt the psychology has not changed much since the Volkswagen squeeze, and whatever risk measures were enacted then seem to be long-forgotten or loop-holed around now.
It also makes me think the answers to these questions above…
Which got me thinking as to why? Is there something we are missing? Could they have a legitimate bull case for continuing to short?
…really could be: they have NOTHING. Only their self-serving pride, egos, over-confidence, arrogance, and complete disregard for their customers. In which case it is really quite plausible that the wheels could have kept turning towards the edge of the cliff, with the driver knowing hitting the brake pedal now is only delaying the inevitable.
TL;DR
Read only the passage in italics in the middle, by a fund manager during the Volkswagen short squeeze in 2008. They’ve got nothing. And they’re fucked.