Robinhood put trading restrictions on GameStop and other high-flying companies Thursday while it raised US$1-billion from its owners and from lines of credit.
Robinhood and other retail brokers came under financial strain earlier in the week as their cash demands soared – they had to pay customers who were owed money from their trades and also had to post extra funds with their clearing house. At worst, the blow to their reputations may make it harder for them to raise their next funds. It’s unlikely that any of the hedge fund bosses who got beaten up by the young traders will lose their jobs, though they must be embarrassed that they were taken down by a motley crew of amateur day traders. By Friday, GameStop was up more than 8,000 per cent over a year, giving the retailer closing many of its stores a market value of US$20-billion. The funds that shorted GameStop, including Melvin Capital Management and Citron Research, lost billions as GameStop went vertical and the funds had to close their short positions. And they still collect the 2-per-cent management fee, which is usually more than enough to cover operating expenses. If the fund is down 20 per cent, the managers don’t have to cover the losses. The formula is a thing of beauty if you are the guy running the fund because any losses are borne by the investors, such as the pension funds. Usually, the investors’ money is locked up for seven years, and all sorts of cute but accepted tricks that mere mortals cannot understand are used to flatter fund performance, including dividend payments, derivatives and dumping investments from old funds into new funds. The second refers to the 20 per cent they take of the profits after the funds reach a certain benchmark. Generally speaking, they work on the “2 and 20 formula.” The first figure refers to the 2-per-cent management fee for the assets under their care. But how they reward themselves is remarkably insulated from risk. Hedge fund and private equity bosses would have you think they are red-blooded capitalists who embrace risk and suck up the losses as much as they celebrate the wins. Money managers weigh on on the latest market mayhem When losing is winning: Shares of unprofitable companies soar The young traders stand to lose everything, and the hedgies may have the last laugh.īull and bubble: Frenzied retail trading, outrageous valuations, easy money drive market madness and other heavily shorted stocks will stop defying gravity (their latest target is Top Glove Corp., the Malaysian rubber-glove maker). At some point, the equity of GameStop, AMC Entertainment Holdings Inc. The other losers, eventually, will be the Robinhood-Reddit mob itself. Since most of us have pensions, that would be you and me. The losers in this romantic little romp were not the Wall Street biggies the losers were the investors, notably the pension funds, that backed them. Never mind that the hedgies and their private equity fund brethren had little to do with the 2008 financial meltdown – it was a lovely narrative, but also entirely fanciful. Here’s what one Redditor said: “We have a once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago … Your ilk were rewarded and bailed out for terrible and illegal financial decisions that negatively changed the lives of millions.” Justice, revenge, retribution! What’s not to like? The hedge funds exposed to GameStop lost billions, effectively triggering a massive transfer of wealth from undeserving billionaires and millionaires to taco-stuffed kids armed with the Robinhood mobile-trading app and accounts on Reddit message boards. into the exosphere, shredding the massive short positions of the Wall Street funds that were betting the shares of the struggling U.S.
I had the same reaction this week, when an army of amateur traders derided – or celebrated – as “basement dwellers” or “trolls” drove the shares of GameStop Corp. Rich guys who live as tax exiles in the Bahamas generally do not garner our sympathy. One of the most amusing bits of the 2008 financial crisis, for me anyway, was seeing the US$1-billion-plus that British billionaire Joe Lewis had sunk into Bear Stearns, some of it just hours before the Wall Street firm collapsed, vaporize in seconds.
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