In Defense of Hedge Funds. Gamestop Squeeze Hides Market Excess Risk, by Daniel Lacalle

Short sellers are often heroes, exposing bad managements. From Daniel Lacalle at

The short-squeeze forced in Gamestop and other stocks through Reddit’s WallStreetBets has generated a massive media frenzy against hedge funds and comments all over social media hailing the decision of a group of small investors to trigger a huge repurchase of a beaten-down stock.

The first thing we need to understand is that hedge funds play an essential role in markets. They provide liquidity, and in many cases are the ones that buy when the largest proportion of equity and bond markets, long-only investment funds, panic, and sell massively.

It is interesting to see how the average citizen and the media tends to blame hedge funds for market crashes when these investment firms account for less than 3% of global assets under management.

When markets crash it is not because of hedge funds attack, but because long-only large funds sell. However, the activity of shorting (borrowing a stock and selling it to repurchase it afterward at a cheaper price) has been demonized numerous times, and usually by CEOs of companies that are missing earnings, underdelivering on their strategy, and destroying value.

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