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Is This The Next Big Hedge Fund To Blow Up… And What Happens Next

Yesterday afternoon, when Gamestop and a handful of the most shorted small cap stocks exploded to never before seen levels, we reported that Melvin Capital had emerged as the first casualty of the Reddit/WallStreetBets forced squeeze/bull raids, when it received an emergency $2.75 rescue loan from its previous investors, Citadel and Point72. The reason why the Gabe Plotkin-founded fund was brought to its knees on the verge of a margin call liquidation, is that among its $12 billion in AUM (which is now well below $9 billion) the company had reported that it also owned puts for hundreds of millions of share equivalents targeting such retail daytrading darlings as GameStop, Bed Bath & Beyond and GSX.

Had Melvin merely held shorts – which it doesn’t have to disclose under current SEC rules – it is unlikely that any of the ongoing fireworks would have ever taken place as the fund would have never attracted the attention of the WallStreetBets crowd which we now know specifically targeted Melvin Capital, and by extension its peers which held concentrated shorts in the same handful of stocks, which incidentally as we reported last Friday, just happened to be the most shorted Russell 3000 stocks, all of which had a short interest to float ratio of 50% or more: a recipe for explosive short squeezes in any market, and certainly in one as illiquid as this one.

In any case, once WallStreetBets figured out that Melvin was shorting not only some of the biggest daytrading darlings but also some of the most shorted names, it wasn’t a stretch to conclude that it would become the target of a violent bull raid and that’s precisely what happened on Friday, when Gamestop stock soared – a move which was catalyzed by Citron’s Andrew Leff capitulating and stating he would no longer discuss his GME short – and again on Monday when the metaphorical dagger to Plotkin’s heart was the spike in GME stock to $159 at which point the fund found itself in a multibillion margin call, and only a bailout by Ken Griffin and Steve Cohen could prevent catastrophe.

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