I've got more on this coming out later today, but it is possible that Gamestop is the financial crisis that breaks the hedge fund model. Financial crises come from hidden pools of systematic risk building up, often in the same kind of institution. This could be it for hedges.

Hedge funds make money by charging their investors 2% of assets and 20% of gains per year, in exchange for pursuing complex financial strategies that can deliver outsize returns. In theory, this model aligns investor and manager incentives. BUT...

How do you deliver outsize returns when the real economy is flat or declining and many financial gains are driven by quantitative easing? Issue isn't flatter returns per se, but that outsize returns are harder (and customers don't want to pay you 2/20). https://www.institutionalinvestor.com/article/b1cvhf12pn9d0h/Most-Hedge-Fund-Managers-Failed-to-Raise-Money-Last-Year

But the hedges have an ace in the hole: near-zero interest rates. What if there was a way to borrow huge sums of money and hide risk tomorrow to deliver outsize gains today? There is a way, maybe: hidden naked shorts and big plays on margin.

A naked short is when you sell a stock that you don't own (imagine selling an IOU). It is illegal for market participants (including hedges) to do this. There's some speculation that hedges have been "secretly" doing this (and there have been cases), but I don't think that's it.

The nakedness is incidental to the hedge strategies (but not to how Gamestop is playing out - put a pin in it). So the loser way to run a hedge fund is to raise money and invest it in stuff. It doesn't deliver the gains you need to become a multi-billionaire like Ken Griffith.

Here's how the smart money plays this macroeconomic environment, especially to maximize your gains (and therefore your 20%). Take the money you've raised (\\$10), and buy shorts, paying a premium. If my premium is 25c for Gamestop (valued $10), I can "rent" $400 of GME.

So at that price point with my $10, I could have bought 1 share of Gamestop...or rented 40. I then take my 40 shares and sell them for \\$400, and then use THAT money to make my real investments. This works as long as my investment gains are greater than the change in GME.

So I want to maximize the difference, by shorting stocks that will go down and making investments that will go up. But I'm not really making my money off how much Gamestop is going down, but based on the huge multiplier I got for my money.

Hedge fund managers would use sophisticated strategies to manage risk, but that's the basic idea. Remember, Gabe Plotkin from Melvin Capitol isn't an idiot. He's one of the top hedge fund managers of his generation: he is the smart money.

He isn't short Gamestop because he thinks "stonk go down". He's using it as a trampoline to jump into gains (including driven by QE) at a much higher level.

Imagine he uses his $400 from shorting GME (for which he paid \\$10) and invests in the S&P 500. Over the span of a year, it goes up 15%. Meanwhile, GME goes down to $9. How did his $10 fund do? His long position is worth $460, his short position is $360 and he paid a $10 premium.

So $10 is up to $90. How much does Gabe take home? He gets 20c in fees from the initial investment. He gets $16 off of his $80 gain. He has transformed an ok year in the markets into an 8x gain for his investors and has, personally, received 20% of that, AT ALMOST NO RISK.

His borrowing costs are so low, and QE is moving markets, and he's booking huge gains. That's the basic move. Now in the real world, the hedge funds are going to have all kinds of sophisticated moves to ensure they make money on this scenario, built on diff risk assumptions.

Why was Gamestop short 125% of its float? Did all of these hedges have really strong feelings about future cash flows of a video game reseller?

How much were hedge funds using Gamestop (and other stocks like it) as a bank? Enough to drive the price down to levels that made NO SENSE given actual cash flows. That was the "asymmetric opportunity" that captured the attention of DeepFuckingValue and Dr. Michael Burry.

Now what is the risk to hedge funds in this strategy? Remember, they don't care *that* much about how successful any particular short position is because that's just a measure of how much "interest" they are paying to their "bank".

So one risk is if all of these positions shoot up in real value. But how? They're stable brick and mortars. So when a company starts to turnaround, that's bad for you. But it's going to take time, which allows you to "switch banks" to another position, cover your short, etc.

But the other risk is if the price shoots up for some other reason. But why would that happen? Well remember, all of the other smart money hedge funds are using shorts as a bank...which is artificially pushing prices down of companies on a slow decline, often brick and mortars.

So you have a hidden risk pool: hedge funds using shorts as a bank to generate funds to get outsize gains to maximize their fees. So what happens during COVID? First, brick and mortars are in a bad place. Great for the hedges! Time to put more money in the bank.

Second, the American government, for the first time, gave everybody money. And some of those people started putting their money into the stock markets, starting with companies they know and like ("invest in what you know!"), including...American brick and mortars.

This doesn't disrupt the hedge fund profits. They're making tons of money off of Covid volatility and the overall macro environment. But rather, these chumps all look like "dumb money". So the hedge funds short those stocks EVEN MORE. This is what happened with Tesla, for example

But now the stage is set. The hedge funds are really, really short American brick and mortars. They are so short, they've artificially depressed the share price, so that from a fundamentals analysis, they look like great buys.

People who like to do value analysis (like retail investors on internet forums) start pointing this out. So you have a real market play. And the people on the other side are "smart money" hedges that people hate, and it starts to spiral and spiral.

The hedge funds are scrambling to get out. They're scrambling not because they made a bad bet on Gamestop, BUT BECAUSE THEIR BANK IS GOING UNDER. They're liquidating positions in such huge numbers they're driving the market down.

Remember, they're not covering their $20 bet on GME. THEY'RE TRYING TO LIQUIDATE THEIR $400 POSITION IN THE REST OF THE MARKET THAT THEY WERE USING GME AS A BANK FOR.

What we don't know yet is a) how many hedges were doing this (it was a whole lot I bet!) and b) how highly correlated they were in choosing their "bank" stocks to short. We're gonna find out!

And here is the kicker. The hedges are running to "switch banks" not liquidate bets (numbers are larger than they appear). But the best "banks" were massively overly subscribed (hence the large short position).

Many of those shorts may have been naked, NOT BECAUSE OF GREEDY HEDGE FUNDS, BUT GREEDY MARKET MAKERS TAKING ADVANTAGE OF HEDGE INTEREST IN THE BEST BANKS. And the markets can't clear, because of all that retail is buying and holding ().

What are the implications of this? Huge losses for hedge funds (and yes specifically for hedge funds), tighter liquidity in the whole market, financial crisis ??? I don't think it's 2008, but it could be S&L sized https://en.wikipedia.org/wiki/Savings_and_loan_crisis

Except, FOR ONCE, it isn't because a financial player hid risk on the American taxpayer's dime, but because they hid risk to steal from investors and bet against American companies. If we can contain the secondary market damage, then maybe that's not so bad.

That being said, there are definitely some macro risks here. If the WSB plan works, it really will be the biggest wealth redistribution in history. And it will have been built on the back of a decade of easy money.