And yes, in theory you should be fine long term, but the problem is it depends on your time window. The market can go nowhere for decades because of all the future profits that get pulled forward. We're staring that exact scenario in the face right now is my guess.
All this is to say but one thing... end the Fed. Their recklessness is enabling this kind of crap.
Everyone who was crushed was under-diversified. Individual stocks fall by 50% all the time.
I guess I just see things differently. This isn't about being properly diversified, this is about the integrity of our markets and trust. I mean if the idea is that it's a free for all then why have securities laws at all? The US markets have been viewed as a haven of trust and stability. Garbage like this only serves to undermine that trust.
It's not "their money" to blow. 80% of that money was borrowed from others and he now cannot afford to pay them back. Yes, the SEC should definitely care
Because the idea is that people who have enough money to invest in a hedge fund have enough money to lose it all and not end up on welfare.
Personally, I'd argue that if what you're saying is the actual position governments take, then there should be way more scrutiny towards organizations, given that they'll come screaming for help in the form of tax cuts or stimulus if they fail (either the failing organizations directly or those affected by the failing organization).
I haven't heard of any hedge fund being given a bailout from the government directly, though.
Your average saver cannot just do this, being limited to 2x as per other comments.
Unfortunately things are very opaque because of the said interconnectedness this article discusses.
> The most recent example I can think of is Melvin Capital (a few months ago). They were bailed out by Citadel.
Citadel buying a controlling interest in a fund that was historically very profitable and hit a huge a landmine, allowing them to buy at a huge discount, isn't really a "bailout" in the same way you're suggesting. Citadel didn't slide them a couple billion dollars under the table and say "don't worry about it, you get me next time".
> Citadel was bailed out by US tax payers in 2009 via AIG
This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
Sure, but the context is that they were doing very poorly and needed liquidity to survive. They received it. That is being bailed out, no? The entire point I’m making is that they receive incredible assistance when very poor decisions are made.
> This was, quite literally 12 years ago. These events are in no way related. Almost every bank was subsidized in 2008/2009. This isn't some unscrupulous "tax payer to hedge fund" hidden money pipeline.
Yes, that is my point exactly. Many of these banks wouldn’t exist if it weren’t for the tax payer.
No, it is not. If they were given free money, or a loan with basically no interest, or some other sweetheart deal, that would be a bailout.
Someone taking advantage of your misfortunate in order to buy you at a discount as not a "bail out".
- an act of giving financial assistance to a failing business or economy to save it from collapse.
I personally wouldn't consider a zero-interest loan to be a bailout. If I buy a car and receive a no interest loan I wouldn't consider myself to be "bailed out", per your definition; nor would I consider receiving a dollar from a friend for a pack of gum to be a "bailout".
Read up on this before making claims that are completely opposite of the facts.
If you buy a car at a dealership and they take that money and donate it to ISIS, did you just support terrorism? No, the dealer did. You only bought a car.
The direct or indirectness of the money flow is unrelated to whether or not something is a bailout.
It happened, it's over. Citadel still exists as a company thanks to the AG bailout. That does not mean everything citadel ever buys is now a government bailout.
That's just silly.
Wait a second. Citadel is a fund manager. AIG is an insurance company. Neither are banks.
When somebody asks for an example of A, and you provide an example of B, they might assume you can't provide an example of A.
Or, the Fed organized it.
They ended up leveraged 100 to 1 and had trillions in bonds.
Coperate limited liability + allowed to leverage more + your friendly competitors bail you out is a suspicious combo, even if each of those in isolation is totally fine.
> “This bailout is for the honest, hard-working hedge fund people who should be assured of making money,” said Biden today.
> “We spent trillions of taxpayer’s money to bail out giant financial institutions who finally had their irresponsible business practices come back to bite them, and it’s only fair we do the same in this latest crisis.”
> “So, it’s only fair that these hedge funds, who once again were more irresponsible with money be helped out by the taxpayer without repercussion.”
> Biden revealed that the trillion-dollar package is set to be rolled out in the coming weeks with no demands for greater regulation or change to business practices.
https://www.betootaadvocate.com/world-news/democrats-announc...
e.g. https://www.nytimes.com/2020/07/23/business/economy/hedge-fu...
“ It remains unclear how big of a role hedge funds played in March’s meltdown — even how many and which funds were involved remains hazy. ”
Hedge funds were most certainly a part of this problem, and were bailed out.
All these politicians profiting off of every transaction, insidertrading, zero accountability or transparency and zero fucking term limits.
The elephant in the data center is politicians and their grift.
I never claimed you did, we're having a discussion, no? lol.
Agreed.
> There is nothing inherently wrong with being extremely leveraged, as long as you are prepared for the outcome. This is why the common joe does not have access to such investments, but accredited investors do.
The downside of an overleveraged investment will affect the "common joe" - given that, what justification is there to allow hedge funds to do it? They receive all the upside, but not all of the downside.
If people don't have money to eat or pay rent then it's a larger societal problem. Beyond that, you are on your own.
You have to borrow something to have a debt that cannot be repaid.
Also, you have to be fairly big to get that kind of leverage. $100 million is probably too small but $1B might be enough.
So you put up $1B of your own money, and a bank would let you go long $3B and short $3B. The idea is that your longs hedge your shorts well so you can't lose too much.
Obviously, in the case of Archegos the shorts didn't hedge the longs well.
Is it really that incredible, in the age of WallStreetBets self-defined 'autists' and 'apes'? There are many ways aside from properly-defined 'margin' investment to do very risky bets.
I think thats the wrong approach, correct approach would be to have rules to protect the rest of economy from that hedge-fund's possible bad decisions. So yes you should have freedom to lose all your money so long as the risks are highlighted clearly (as in enforceable, good faith, non-fine-print legalese).
A global pandemic got close, but they've just been printing money as fast as possible to stave it off.
Time will tell if that's a good long term strategy.
Classic doubling down on failed leverage and classic signs of the massive bubble in financial assets about to implode.
I find it suspicious that he went from fraud in a hedge fund Tiger Asia involving manipulated prices and insider trading (for which he was convicted) to a less regulated family office using things like swaps which avoid oversight, and which he then proceeded to blow up with excessive leverage (and possibly other illegal shenanigans to manipulate prices), using instruments which avoid oversight on stock positions, most likely using leverage he obtained by lying to banks about his exposure - I sincerely doubt the multiple brokers were aware of just how much exposure he had and how concentrated it was, and they all raced to call it in when they found out.
I'd be very surprised if there were no illegal activity there which would not have been caught by increased oversight, though of course it is now in nobody's interest to look into that too closely.
I think dislodging US dollar from being 'reserve currency', and subsequently removing US (and UK) financial and judicial systems from being the 'international financial litigation and contract management' realms -- will do it.
If it USD is replaced by a gold-backed crypto currency network that uses something other than 'Proof-of-Work' to ensure resiliency against attack. This will be 50% of the steps to get to the above.
Replacement of US and UK judicial systems as 'arbitrators' of the contract terms -- will be harder to replace, however.
Overall US dollar seems, now supporting what some would call, 'perception based' economy.
Where majority of the leverage are afforded to non-material based businesses (Ad networks, financial services, legal services, etc).
This kind of focus, perhaps affects the direction of the world progress.
Not sure if this 'skewing' is good or bad for the world and future generations.
For long time, there was no alternative to Western world ideals and approaches in many respects.
But the trust in these has been quickly eroding, and it started decades ago.
We might be at the 'apex' of the trust erosion process, but yet to see where it will go.
Right now, whether it is a 48K USD for an influencer's ticktock post, or 60K USD + for a bitcoin, or 20 Bln USD losses by a small hedge fund.
This all hardly makes any sense ... to many. Unless you look at it as faint indicators of the USD super-volcano-sized inflation, erupting.
Yes, you're entitled to the gains, but at the end of the day the prime brokers hold $500mm in VIAC stock and $100mm in cash. The prime brokers should not have been lied to, should not have been allowed to get these positions on swaps, and finally should have had an internal risk alert that says "this client is way past their leverage budget!".
Another strange thing is the following:
> U.S. rules prevent individual investors from buying securities with more than 50% of the money borrowed on margin. No such limits apply to hedge funds and family offices. People familiar with Archegos say the firm steadily ramped up its leverage. Initially that meant about “2x,” or $1 million borrowed for every $1 million of capital. By late March the leverage was 5x or more.
Why are the rules not also applied to hedge funds? I wish I could say this is the only one, but from my knowledge there are a lot of rules that pretty much only apply to retail.