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From the headline coverage, the options trading is made out to be a Main Street vs Wall Street phenomenon: or even sensationalized to average Joe vs banksters.

But it seems that the hedge fund keeps a low profile: Plotkin doesn't go on the air to the extent of Dalio or Ackman. Moreover, with an institutional client-base of mostly endowments and charities, it seems Melvin Capital is mostly managing assets that are explicitly for goodwill and higher education. Their website is rather basic; I couldn't find a detailed AUM breakdown for how much is philanthropic capital.

I'm sure all the fine print is in order when an asset owner mandates out to a hedge fund, but surely there is a moral component to this.

Question

Essentially my question boils down to: if it's public knowledge that this hedge fund is managing a large amount of philanthropic capital, are investors on the other side of the trade acting as barriers/exploiters of the goodwill?

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    Hedge funds are prohibited from advertising and sometimes that includes AUM. It is a 90 year old government abridgment of free speech that is convenient enough for the wealthy people subjected to it not to care. Flashy informative websites are only a form of legitimacy for poor people who can need to mentally check 100 boxes before parting with their $20 for a consumer electronic. Institutional investors do not gain anything from the presence of a nice website.
    – CQM
    Feb 3, 2021 at 7:05
  • @CQM Required not to have ads, interesting problem to have. Wonder why the SEC singled out hedge funds Feb 3, 2021 at 7:30
  • The "Main Street" traders who started the GME thing did exactly the same than "Wall Street" traders would have done, if they had ignored the risk of a conviction for market manipulation. The Main Street traders who started this could not care less if some less economically literate people saw the bubble and invested in it at its peak because "it is going up and I am going to get money". There is no moral angle.
    – SJuan76
    Feb 3, 2021 at 10:25
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    Sorry guys, this question just has no connection to "personal finance" - we've gone too far!
    – Fattie
    Feb 3, 2021 at 10:41
  • @Fattie I suppose there is a degree of subjectivity as what "money" refers too in the SE title. Also, surely the ethical-investing tag applies to more than just ESG? Of course, I'm just one voice here. Feb 4, 2021 at 5:33

2 Answers 2

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Notwithstanding the activity over the last weeks, do you think Melvin as an entity, Plotkin, Ackman, Dalio, or the great Buff man care who specifically is on the other end of a trade, ever? Have you ever cared about whether the share you just bought was sold to you by a nearly destitute widow about to be out of money? You have no fiduciary duty over Melvin's fund. By just about any measure Melvin took a pretty rational position against GameStop, but was too aggressive in scale and hedging.

There have been short squeezes before and there will be others in the future. As far as I'm concerned the sensationalization of this one by the media is criminal. The people involved are in it to make money, you've got to be kidding yourself if you think there was no institutional money also adding fuel to the fire on the buy side of last week. I don't buy for one second that all of this materialized by small retail traders.

The real moral of the story here is that no one is sticking it to the "banksters" by buying a $2 company for $300. A lot of greedy fools are being separated from their money. And some of the greedy fools will live to lose their gainz another day.

Whatever happens to a hedge fund and its investors' money isn't your concern. Hedge fund investors were there for a high risk high reward strategy. Investment advisers who bring their funds to a hedge fund may have some explaining to do when the strategy goes sideways like it did here. I'm sure there will be congressional hearings and lawsuits about whatever institutional "safeguards" were ignored, skirted or failed.

Separately, short selling isn't some immoral endeavor just because Elon Musk complains on Twotter when people question Tesla's valuation (incidentally there have been a number of short squeezes in Tesla's history). You better believe Elon isn't going to bail out any of the GameStonk crusaders when the music stops on this one, neither would Melvin's "Goodwill" clients or whoever else you think was on the other side of any of your trades.

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  • The interesting issue here is that there was a lot of people willing to sacrifice 1-100$ in order to actively harm a company for billions and via minor trading apps are now able to do so. Sure, there were speculants trying to make a buck as well, but the big damage was people buying shares for a high price, to hold them. "diamond hands". Bragging about how high they bought. That is a game changer. Maybe a poor reputation with "the mob" is going to be a significant risk factor even for B2B or hedge fund operations.
    – Stian
    Feb 3, 2021 at 13:19
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    people buying shares for a high price, to hold them. you left out because they thought the price would go up. There was no good vs evil, a lot of fools saw DFV's account value go from $50k to $45mm and thought the mania would last until GME hit $1k/share or $10k/share or whatever and they could then sell to a greater fool. This is classic bubble mania, nothing new or unique.
    – quid
    Feb 3, 2021 at 16:28
  • no, you have missed an important point. A large part of the reddit community was adamant on not selling whatever price got to. It became a meme unto itself. They kept buying as it rose. Sure, many cashed out. But more held on, and kept buying to hold.
    – Stian
    Feb 3, 2021 at 16:42
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    and that hasn't been seen on this scale before. Sure hedge funds squeeze each other when they can, if they think someone has overshorted. But they are by and large rational actors. This wasn't that.
    – Stian
    Feb 3, 2021 at 16:45
  • I think you are believing what you want to believe. "If 4chan had a Bloomberg terminal" is the tag line. "Many cashed out but more held on," based on what data? The price just went from $300 to $90, seems to me that more sold and there are some trolls on the internet.
    – quid
    Feb 3, 2021 at 16:48
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No

are investors on the other side of the trade acting as barriers/exploiters of the goodwill?

Nobody is trying to squeeze GME because they think charities are easy targets or some sort of nefarious purpose. Now, if certain charities have placed funds into hedge funds that undertake risky trades, that's entirely an issue between those charities and their hedge funds. It is not the responsibility of other traders to try and protect a hedge fund from poorly placed trades - not only is that not profitable, but it would distort the market.

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