Really the only thing the hedge funds could do to "win more" in the long run is to stop shorting stocks en masse.
The more they short sell, the more this can be pulled off again and again.
Which is good IMO, I'd be happy in a market where short selling and negativity in general just isn't a thing. If you aren't optimistic about a company just stay out.
Hard no! I want scams and shady schemes uncovered. What a disappointment that Herbalife wasn't brought down by the shorts.
I'm struggling to even understand what a market with "no negativity" means. We want to evaluate firms with a critical eye. If they are mis-valued, that serves no one.
>I'm struggling to even understand what a market with "no negativity" means.
Just imagine basically... every single other market. The price of goods at Walmart is not based on your bet on supply and demand.
If there are more buyers than sellers, the price goes up. If there are more sellers than buyers, the price goes down. If a business wants to raise money by issuing new shares, supply and demand will dictate the price.
The market doesn't need uninvested third parties sitting outside the ring gambling on the supply and demand outcome in order to set a price.
I think you're arguing for a market with only direct investments and no secondary derivatives. If that was all the equity market was, we could be in the same zip code.
However, we live in this hyper-securitized world, where every part of the economic fabric has bets for and against, with insurance, leverage and information asymmetry baked in.
The only way to "discover" price is to provide instruments that provide "gravity" for both upward and downward price movements. The lack of supply on it's own is not enough, especially when malicious actors are pushing on the supply and demand levers.
> The price of goods at Walmart is not based on your bet on supply and demand.
This is a specious argument. You literally could go out, borrow your friend's crate of 10,000 bananas, sell them on the open market, then wait for the price of bananas to crash, and then buy them back (maybe even the same crate!) and give them back to your friend, plus whatever the banana margin costs. Effectively, if you were to do this at scale, you would directly be influencing the price of goods at Walmart. Mechanically, this isn't how it works, and I don't think there are banana futures and options, but thinking that all derivatives activity is speculation is simply naïve.
On the GameStop excitement, all I have to say is...
For better or worse, derivatives-based economies are incredibly resource-efficient. By creating a formal system for actually assigning universally-understood value to promises, we can do a lot more with a lot less.
Sometimes bad things happen, but you can be sure we'd have none of the niceties of modern society without a derivatives-based economy.
Immediate cash just has a ceiling for what it's capable of supporting.
Well the general discontent with the financial system stems, I believe, from it being perceived as mostly a walled garden in which professionals have built a complicated and highly self-referential system few control (Blackrock cough) that makes and keeps them disproportionately wealthy.
To anyone in the working population it must seem like an instrument designed to keep the pressure on and not serve general society or those providing actual tangible things of value to the market, like goods and (non-financial) services.
I actually tend to agree but it's pointless to battle the market's cold logic (which often does make sense to me from what little I know) or existing power structures.
Solutions/counterforces need to come from society and civil institutions. If those are weak, gotta fix that first and the market would depict a more equitable society without prejudice. It's the same old rich vs poor repainted with complicated terminology and systems, really.
Another thing to improve would be transparency and education about what's going on in finance like with personal accounts of people working there for instance, making it less of a stranger and showing some of its internal logic and the things it does well or not so much.
> We want to evaluate firms with a critical eye. If they are mis-valued, that serves no one.
Hard disagree here. Sometimes mis-valuing firms serves a LOT of people. There are many firms who could create value if only they had more capital to work with. As an example, it's very possible that a company hard hit by COVID could recover if they got fresh capital and used it to explore new business models that are quarantine-friendly. I'm all for kicking out non-believers from being involved in their equities in any way.
You can't short sell most early stage startups. If you don't believe in them you just don't invest in them. It's that simple.
As for companies who do bad things, like laundering money or misusing funds, we don't need to short their stock, we need to take them to court and get them punished.
You know which firms are really mis-valued? Hedge funds. They sit in armchairs in high rises on Wall Street and do nothing for me.
Exactly! from who the short are getting their money when they crash a company stock like Wirecard? Not from the company management who did it but from other shareholders, and most of the time "retail" shareholder.
They are running to the ground company that may survive with a fresh injection of capital, and destroying company that suddenly cannot raise more capital or have no more collateral for a loan.
Moreover they are this hedge fund are manipulating information to the level of a troll farm. I was a shareholder of AMD when they where starting to release the Zen architecture. Every other week, they were sending report of "problems" with the new architecture, or even basic feature behaving normally. Hedging is ok, but betting as they do is not. And when they get burned I celebrate!
> You can't short sell most early stage startups. If you don't believe in them you just don't invest in them. It's that simple.
I'm not sure the world would have been a worse place for it to have been profitable to point out the failings of say, Theranos.
And the unlimited downside means that shorting startups that are merely unlikely to succeed wouldn't be worth the effort.
Shorting public companies that can survive COVID perfectly well by raising additional funds would be a terrible strategy too: their ability to raise funds won't really be dependent on their share price (they'll be raising debt funding instead) but every time they find a lender the share price will rebound.
Short sellers are incentivized to uncover scams and overvalued equities, as a few other folks pointed out. There are firms like Muddy Water doing the hard work of finding companies swindling investors and using publicly available data to make a case against them. Without short selling, they lose the incentive to do that.
Scams can be uncovered by CUSTOMERS and plenty of other people than short sellers, and I don't think overvalued equities is actually a problem. Many times overvalued equities leads to faster adoption of EVs and solar and better GPUs and other nice things, which are more important to my personal life than maintaining the sanctity of capitalism.
Overvalued equities lead to market crashes that tend to wipe out the retirement funds of unsophisticated investors and bankrupt otherwise viable companies. Has everyone forgotten about the dot com bubble of 2000? If so I think we're headed for a reminder.
The more they short sell, the more this can be pulled off again and again.
Which is good IMO, I'd be happy in a market where short selling and negativity in general just isn't a thing. If you aren't optimistic about a company just stay out.