What risk management lessons can we learn from Melvin Capital 50% loss in Jan 2021?

globalarbtrader said:
However if Melvin had maintained their risk, or even better got out completely at $20 or $40 then we wouldn't be talking about them now. They couldn't because their position was too big.
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Yes, having too large a "position vs the average handle" is a risk. Some say your play shouldn't be bigger than 2%. Well, that means you are 1/50th of the market all by yourself. I like the idea of being no larger than 1/200th of the market (.5% of the handle). Seems like a good idea for hedge funds, too.

I don't know... Melvin might have been "OK sized" but just failed to stop out.

If one cares to lever up... buying levered options at least limits risk. And then there are index futures... where there is enough liquidity that stops can be effective.
 
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The biggest risk-management lesson is not to short. At least, don't short in a raging bull mania with many worthless stocks and assets racing higher at triple or quadruple-digit annual rates, all major governments printing billions per hour in new currency, etc. The idea of having a bucket of longs 'hedged' by a bucket of shorts is too simplistic.
 
The very obvious one is, why the hell borrow shares of stock to short any stock for that matter? The risk profile for shorting stocks by borrowing shares is unlimited risk to the upside. Compare that with just buying put options where the total risk is only the cost of the premium? Add to that the leverage, that if the stocks moves in your favor by a huge amount, the leverage will give you huge returns on your put option compared to shorting the stocks by borrowing it? It seems like a rookie mistake new traders would only make. Then, again when hedge fund manager legend Steve Cohen made the same mistakes, well, they are after all still human. However, this was a very costly mistake to make.
 
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GME tanking big time today. Hedge funds should be very happy. WSB traders getting slaughtered. Easy come, easy go. So much for the fairy tale that retail traders drove the share prices of GME and AMC higher. It was other hedge funds who drove prices higher. The same hedge funds that are now short GME and AMC. Without the hedge funds, see, the small retail traders cannot hold the prices up. These are the same traders fighting each other to pay the most at the very top. This is a very expensive lesson for these retail traders to never listen to trolls on social media egging you on. Most have lost most of their monies. A few got lucky and had the sense to get out while, the going was good.
 
Here's my own take.

GME's short interest was more than 100% at one point. I don't know how much of that was from Melvin. However, I expect any risk manager seeing a stock with a senseless >100% short interest would have insist on reducing the short exposure to this single short. Maintaining a huge short on this kind of shorted stock is bad bad risk management and suggests undisciplined greed.

Any stock which has >100% short interest makes it an easy target for short squeeze, even if the business fundamentals is terrible enough to make it a good short candidate.

helpme_please said:
Melvin Capital was one of the top hedge funds since inception in 2014. They are one of the few hedge funds who handily beat benchmark stock market indices. I expect them to have top-notch risk management to produce this kind of performance. Yet, they lost >50% in a single month alone.

Can the risk management experts in this forum share their insights how could this happen to a top hedge fund? What mistakes did Melvin Capital make?

https://www.wsj.com/articles/melvin...y-hurt-by-gamestop-and-other-bets-11612103117

Melvin Capital Management, the hedge fund that has borne the brunt of losses from the soaring stock prices of heavily shorted stocks recently, lost 53% on its investments in January, according to people familiar with the firm.
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How do you short 140% of the stock? I'm having a hard time wrapping my head around that one. I'm also having a hard time wrapping my head around why the retailer, gamestop, let itself gracefully get fucked in the ass like it did and stay quiet. Like they almost wanted to get raped and go bankrupt. Something isn't right.
 
PintoFire said:
How do you short 140% of the stock? I'm having a hard time wrapping my head around that one. I'm also having a hard time wrapping my head around why the retailer, gamestop, let itself gracefully get fucked in the ass like it did and stay quiet. Like they almost wanted to get raped and go bankrupt. Something isn't right.
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borrow from someone that borrowed it. easy
 
PintoFire said:
Can you go on forever with that or are regulators supposed to step in at some point.
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no regulations currently that im aware of, but most expect SEC will add some restrictions following this whole fiasco

also expected is a stricter definition of 'manipulation' since its such a grey area
 
ducatista said:
no regulations currently that im aware of, but most expect SEC will add some restrictions following this whole fiasco

also expected is a stricter definition of 'manipulation' since its such a grey area
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Yeah, they'll fuck around with the rules to prevent a repeat of retail screwing the hedgefunds.
 
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