Citadel just pulled $2 billion from Melvin Capital after the hedge fund has failed to recover from shorting ‘meme stocks’ last year.
Melvin Capital lost $6.8 billion in January of 2021 and has not been able to get out of the trenches since.
Now Citadel is fleeing a sinking ship.
Should this be a warning to short sellers shorting AMC and GameStop?
Let’s find out.
Welcome to Franknez.com – smart money might not be so smart after all. So called ‘meme stocks’ continue to leave an imprint on Wall Street. Will they be able to get out of this mess?
Let’s dive right into it!
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Citadel loses confidence in Melvin Capital
Citadel also lost billions last year shorting AMC, so it comes as no surprise their reason to pull back from Gabe Plotkin’s Melvin Capital.
The hedge fund also imposed tight restrictions on its clients leading into the new year.
Citadel’s customers were given an ultimatum to either stay with the hedge fund otherwise coming back would prove to be difficult.
Ken Griffin also received a $1.2 billion lifeline from partners Sequoia and Paradigm in January this year.
This was the first time Citadel had ever received private funding.
With Melvin Capital down another $2 billion it seems it’s only a matter of time before this hedge fund caves into default.
The hedge fund initially held $12.5 billion in AUM.
It lost more than half last year and with Citadel pulling their investment things aren’t looking so good for the short seller.
Hedge funds that closed in 2021
Last year we saw a few hedge funds shut down including, Archegos, Anchorage Captial, and Mudrick.
Anchorage Capital closed after an 18 yearlong streak.
The short seller had 4 million puts of AMC stock before it closed last year.
Do you think Melvin Capital is next?
Leave a comment at the end of the article.
Will hedge funds survive?
Hedge funds are currently facing deep scrutiny from both retail investors and regulators.
The DOJ is taking Morgan Stanley, Goldman Sachs, and numerous other hedge funds to court.
Citadel is one of the short sellers currently being investigated by the Department of Justice according to a Bloomberg report.
The SEC and DOJ are looking into the following:
- Communication between banks and hedge funds
- Proof of ‘Bear Raids’
- And several other market manipulation tactics
Hedge fund Muddy Waters was already raided by the FBI earlier this year for flooding the market with fake orders to drive stock prices down.
Corporate media has been quiet about the incidents since they too may be under investigation for colluding with hedge funds on negative publicity campaigns.
The community has called out mainstream media for deleting articles online on AMC and GameStop.
Would you be surprised if they too came under investigation?
What are regulators doing about hedge funds and short sellers?
The SEC just released a market transparency proposal report outlining rules that will lift suppression on ‘meme stocks’ from short seller manipulation.
Hedge funds betting against AMC and GameStop will fall if these rules are enforced.
Regulators are looking to micromanage short sellers and track their every move when it comes to creating a short sell in the market.
You can read a more in-depth overview of the proposals here.
If these proposals go through, surging share prices will cause ‘meme stocks’ to squeeze shorts from their positions.
The SEC warns short sellers of “short squeeze” risks in the report.
Despite the progress, many retail investors aren’t fully convinced, though more seem to be giving the SEC the benefit of the doubt now.
Whether you believe regulators will take appropriate action or not, you cannot deny hedge funds are in serious trouble.
Citadel bailed out Gabe Plotkin’s Melvin Capital last year but is now taking their investment back to keep afloat.
What do you think is next for hedge funds?
Leave a comment below.