wallstreetbets — How a group of Redditors is crushing superstar hedge fund managers.
Hedge fund managers and wall street are mad as hell. Here is why.
For years, wall street and hedgefunds have made billions by coordinating short attacks on corporations. A short attack is one where hedgefunds place bets on the value of a corporation’s stock declining. In other words, hedgefunds make money when stock price goes down. So after putting on such a bet, hedgefunds try to do whatever they can to bring down a corporation's stock price.
These attacks are highly effective for three reasons. First, they are coordinated by a group of hedgefunds. Even if they are not explicitly coordinated, many smaller funds will follow a star fund and make the same bets, making the attack stronger.
Second, they are backed by large amounts of capital that hedgefunds borrow from wall street. Yes, the same wall street banks that are “too big to fail”. Which means that if these large and risky bets cause banks to fail, the fed will step in and save the banks with, you guessed it, taxpayer money. So banks have little downside and large upside from lending money to hedgefunds for these risky bets.
Third, hedgefund managers use the financial media to launch an aggressive PR campaign to discredit the target corporations' management team and their business with the goal to bring down the stock price.
WallStreetBets — finally a win for the small investor
For the first time, a group of retail investors on reddit decided to fight back against short attacks from hedge funds. They picked stocks on which hedgefunds have large and public short attacks and decided to pump up the price by buying in large groups. WallStreetBets a subreddit has over 2 million retail traders who buy and pump up prices on such stocks. As the stock prices went up, hedgefunds who are on the other side of the trade, starting amassing huge losses. These losses are in the billions causing other larger hedgefunds to step in to rescue their loser hedgefund friends.
This is an outright battle between the retail investor and organized finance. And organized finance is losing! For the first time ever, there is a transfer of wealth from hedgefunds to retail investors.
Not only is this strategy ingenious, this is also a huge win against organized finance. For years organized finance has created wealth for themselves without creating any real value for the economy. I know because I spent six years working for a large hedge fund (worst life decision ever).
Hedgefunds and wallstreet banks are so mad that they are calling on regulators to step in and shut down the retail investors. The same organizations usually fight tooth and nail against regulation.
Of course, the retail investors are taking on a lot of risk and at least some will see their portfolios getting wiped out. But the message is clear — “dumb money” aka the retail investor not so dumb anymore!
Disclaimer — if you are long some of these stocks, understand that these are very very risky bets and there is a good chance you will lose heavily on these positions. Nothing here is financial advice.
