When Hedge Funds Try and Cheat the System

Hedge funds have a history of trying to use cheat codes to steal money from either companies or retail investors and fatten their wallets. One of the more popular tactics they use is shorting stocks, for some short them so much that it can bankrupt the business. Less often do we see people fighting against these shorts causing a squeeze on the stock, causing the price to skyrocket. These squeezes can be so damaging to the market, that they may even cause the market to crash. It's also important to review these past squeezes and compare them to the situation that has been going on with GME since January.


The Volkswagen squeeze is one of the more famous squeezes to happen as it caused some hedge funds to take massive losses, as well as the squeeze occurring in the middle of the 2008 global financial crisis. So what happened? Volkswagen was in the process of being acquired by Porsche, which caused its ordinary shares to rise in price while its preference shares to stay the same.

Hedge funds wanted to take this opportunity and short their shares because they thought it was over-valued. What they didn’t realize is that Porsche had taken a majority of the float(existing shares that are available to trade) leaving only 6% in free float, whereas short sales had risen to 12% of the total outstanding stock. This caused a squeeze shooting the price from ~€200 to nearly €1,000. This squeeze ended up costing hedge funds upwards of $30 billion.


DGAZF is another stock that was recently squeezed to the moon. It had a jump from $125 to upwards of $25,000. There are multiple sources that have differing opinions on how this happened. The Street had a good analysis here. Their theory stems from the fact that Credit Suisse deciding to delist DGAZF and letting it drift in the over-the-counter market instead of just closing it out. Furthermore, no new shares are being issued, this essentially turns it into a rare commodity. This has made some collectors want in and since there is a limited supply in the world their willing to pay top dollar for shares.
 

Short sight had a different analysis on it which you can find here. Their analysis shows that DGAZF had 140 million shares shorted or 45.94% of its float and an 18.59% stock borrow fee. This has had huge consequences for the short sellers causing over $2 billion in losses. What’s even crazier is that this is just what happened with 45.94% shorted, GME supposedly has around 100% shorted.

An issue that pops up if you try and look up how many shares are shorted for GME is that many of the shorts are being hidden in different exchange-traded funds. This post on r/GME titled: “Comparing Rough GME Numbers to VW '08 Numbers: Why the VW Chart is About to Look More Like a Speedbump” goes into more detail on how the apes of Reddit know GME is going to be squeezed to the moon. A key piece of information that it uses is based on this Reddit post: “INSTITUTIONAL OWNERSHIP AT 207% (some updated as of 1/31/21 after the gamma squeezes)” along with this graph:


Which shows that the total shares of GME are over 200%. The only way for you to have more than 100% shares is if you are shorting the stock. This is unprecedented and if the effects of a 45% shortage are causing a price increase of $20000+ then how far will GME go? As it's said there's an infinite risk to shorting stocks and it seems the hedge funds have taken on that risk. This is what happens when you try and cheat the system.

Due to GME’s unprecedented level of shorts and the retaliation coming from the retail investors of r/SuperStonk and r/GME it may cause a squeeze so steep that it could crash the stock market. I’ve done a bit more research and have written another article that you can read here about the crash.

This is not financial advice, I own GME and like the stock.

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