Melvin Capital was one of the hottest hedge funds around coming into 2021. The $12.5b fund returned 50% net of fees in 2020. Just three weeks later, after an epic short squeeze, it needed a ~$2.8b bailout from fellow hedge funders (and Melvin investors) Ken Griffin and Steve Cohen.
But the Redditors' GameStop blizkreig may be burying many other hedge funds as well. After all hedgies have to short stuff to "earn" their shrinking 2 & 20 fees. Not only were many of them in the same GameStop short, but now Redditors are using the same playbook and squeezing other overly shorted stocks too. The below (H/T ZeroHedge) chart shows how the most shorted stocks have ripped higher, presumably forcing HFs to cover their positions.
At the same time to stay "hedged," funds have to sell their long positions. The Goldman Sach's VIP basket of stocks most widely held by hedge funds have tanked this month. Losses on both sides, long and short, particularly when your are levered can be very painful.
So, after the best year in a decade for hedge funds, January could be one of its worst months.
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