How young, hip small investors fear fear with Gamestop hedge funds

Thursday, January 28, 2021

Hedge funds are getting scared
"Many don't realize what's going on here!"

By Diana Dittmer

Young small investors organize themselves in Internet forums in order to drive up the prices of companies like Gamestop and to make money. Once powerful hedge funds and short sellers suffer from this. Is it good? Exchange expert Dirk Müller warns: "The situation is extremely dangerous."

Millions of little Robin Hoods are conquering Wall Street and making the financial world better. This impression arises when you hear that young small investors are organizing in droves to propel the prices of individual stocks up like a catapult. Suddenly they are throwing billions in hedge funds into serious trouble and delighting opponents of professional speculators. Exchange expert Dirk Müller warns ntv.de: "What happens at Gamestop reveals that the exchange is no longer a playing field, but a battlefield."

Small investors have bought shares in the computer games chain en masse since mid-January and have ensured that the market value has risen 17-fold. Gamestop isn't the only title that's so hyped. The young investors meet in Internet forums such as Reddit for concerted buying campaigns and benefit from professional investors such as hedge funds who have bet on falling prices. In this week alone, this has driven the game stop rate from 75 to at times 380 dollars.

"If you suddenly have the opportunity to influence the market, then you do it because you think it's great and want to make the money," said Müller. "But many are not clear what's going on here!" For him, the hype has nothing to do with a David versus Goliath fight or small investors pulling their teeth from Wall Street sharks. The now numerous hypes fueled by small stocks threatens a dangerous chain reaction that could lead to the "downfall of the financial world as we know it", warns the former stock trader, who became known as Mr. Dax.

"Hedge funds are not just the bad guys"

"The situation is extremely dangerous," says Müller. The Reddit gamers did not understand the business model of many hedge funds or they simply did not care because they had their own profit in mind. "The vast majority of hedge funds we are discussing now have a much more balanced business model than it looks at first glance. I don't like to protect hedge funds, I consider the short-selling business model to be dangerous. But you have to understand the whole model . "

Many hedge funds, explains Müller, not only rely on falling prices. They then invest the money they win with their short bets in good stocks of companies whose business model works. For example: Apple or Facebook. Hedge funds "aren't just the bad guys," he explains. "They hedge, they protect themselves. They say to themselves that over time the good stocks will develop better than the bad ones. So the bottom line is that we're making a profit." The principle is simple: if the overall market rises, all stocks rise, if it falls, everyone falls. For investors, this means that they have relatively few fluctuations in their portfolio. But the whole thing only works if the calculations with the short sales work.

But she doesn't do that right now. If millions of users put in perhaps 3000 euros each, billions of dollars come together. If that is used to pull prices up, the balance sheet of the hedge funds is broken. You could already see the consequences of this. The first hedge funds have already got into trouble due to the virtual flash mob at Gamestop. The hedge funds Citadel and Point72 had to help Melvin Capital at the start of the week with $ 2.75 billion to prevent the competitor from collapsing.

"The golden Robinhood players are destroying the stock market"

“What they're short suddenly explodes upwards and they're making losses. They have to buy back the stocks at insane prices with a premium of 200 or 300 percent, if they can get them at all. Or they have to pour in more money because they put up collateral had to go to where they borrowed their shares. They urgently need cash, "says the stock market expert. They are forced to part with other investments in order to make up for their losses. In Müller's eyes, the dangerous consequences can already be seen in the recent downturn in Dax, Dow Jones & Co. "The slump in good stocks like Apple or Facebook goes hand in hand with the hype about these small stocks. The little Robinhood players who attack the big hedge funds that are so cute and sweet are destroying the stock market."

The crash could lead to "a chain reaction that can destroy our entire financial system". A foretaste of what could happen was already in 1998 when the near collapse of the Long-Term Capital Management (LTCM) hedge fund shook the global financial system. The hedge fund had to be absorbed by other banks with a billion-dollar rescue package, otherwise the downfall of LTCM could have meant the collapse of the American banking world.

Billionaire hedge funds in trouble by equal gamblers: "I don't want to know how many special meetings took place tonight," says the stock market expert. The bill, he thinks, is paid by normal savers. "The chain reaction that is triggered does not only affect the hedge funds. The entire pension scheme depends on it, the pension funds depend on it. The boys are destroying their parents 'and grandparents' pension schemes."

There have always been "messes", but the stock exchange was still "an honorable place", says Müller. "It was the place where money was raised to fund companies that would use it to create machines and jobs. Trading the stocks was secondary." In the meantime, the stock exchange has degenerated into a theater of war. "It's not about investing in a good company. It's about people meeting here to make a profit."

Müller is watching the development with concern: Gamestop will probably not be the end. There will be more concerted action on the internet triggering stock hypes. On the messenger service Telegram, over 6000 people have made an appointment who are planning similar campaigns with short stocks in Germany at the beginning of February – also via Reddit.