Are retail investors unknowingly helping hedge funds recover losses?

If I were short GameStop or Amc in Portfolio “A” before the organized rally on the stock, I would have certainly used January 28th to cover my position even if it came at a huge loss, but with no worries at all.

Especially after a 2.75 billion dollar investment from Citadel 3 days earlier.

Why no worries? Because I would realize the losses would be easy to recover from Retail Investors by “Buying” shares in Portfolio “B”.

Before we go any further, Let’s review what we know.

1. Melvin Capital was beat down to the tune of at least 30% after heavily shorting GME and AMC stocks.
2. On Monday, Melvin Capital announced that it had received an investment of 2.75 billion from Citadel and Point72 Asset Management as an emergency influx of cash that would help stabilize Melvin Capital.
3. In contrast to what some Retail Investors may believe, Citadel does not own Robinhood Markets, but they do have a very close relationship with them.

It should be noted that Robinhood Markets generates its income from payments for “order flow” and that makes Citadel Securities one of Robinhoods largest customers.

Now then, let’s ask the obvious question,

Did Robinhood Markets shut down Retail Investors from Buying Shares on January 28th to protect their “Mom and Pop” Investors or did they make the move to protect Citadel, their largest customer, which just 3 days earlier, on January 25th, dropped 2.75 billion into Short-Selling Melvin Capital?

We find it odd that Robinhood Markets decided to shut down their trading platform to Retail Traders, preventing them from buying shares as a way to protect Mom and Pop. So let’s attempt to put some pieces together, shall we?

Let’s say the short-sellers Melvin Capital and Citron Research covered their positions when GME shares fell to-$112 and AMC shares fell to-$6.51. Let’s refer to the short interest position they had as being a part of Portfolio “A”.

A “Smart” short selling hedge fund manager with a new found 2.75 billion would be thinking ahead, and would have used the opportunity on January 28th to not only cover their short positions, but to “acquire” as many shares at the bottomed-out prices as they needed to start recovering their losses.

Remember, they (hedge funds) were the only ones allowed to buy shares of AMC or GME as share prices plummeted during the Robinhood Markets strategic lockout. Shares that they knew had an extreme retail demand. So much demand that it was a topic found in all of the national news media outlets.

Let’s consider the financial opportunities of that day as a “Short-Seller” that was just handed a tactically planned out superior position, with non-restricted access to buy GME or AMC shares.

We would first have to close out and cover our short position in Portfolio “A”. Then we could open a new position in, let’s say Portfolio “B”.

For example, Let’s say I purchased AMC shares for Portfolio “B” at $6.51 a share on the same day that I covered my short position in AMC in Portfolio “A”. I would buy the same amount or more shares of AMC for Portfolio “B”.

I would do this because I realized that the Retail Investors were going to continue their rally and push the share prices back up within a day or so. If for no other reason, as a show of force against being locked out.

I would then use my newly purchased AMC shares in Portfolio “B”, that I picked up at $6.51 on January 28th, and I would feed them back to the rallying retail investors for $13.50 to $14.50 a share, making 2X profits on those $6.51 shares all week long as their rally continued.

I would have to hope that they didn’t lose interest in the stock as I unloaded thousands of shares every time it hit my predetermined sell mark.

If they (The Retail Investors) realized the stock price was being held back now at $13.50 to $14.50 a share simply because every time it hit that range I sold off thousands of shares purchased at $6.51, they may begin to feel it’s a lost cause and lose interest.

I would certainly sit on a large number of shares in the new Portfolio “B” while waiting anxiously for next week. Because I would realize that the Rallying Retail Investors would most surely point to the “Days To Cover” date as a target, not knowing or even caring that I already covered my short position. I would anticipate that they would hype each other in forums and chats to “buy and hold” specifically for that date. That could potentially be my biggest payday in the event.

Dumping a few hundred thousand shares of AMC back onto the Retail Investors for $18 to $20 and even higher would be extremely easy to do. The profits would more than cover any losses I incurred from the previous short position I held in Portfolio “A”.

While Retail Investors are assuming that higher prices would cost short-sellers more, they may actually be helping the hedge funds recover.

All the hedge funds would need to do is stay out of the way, Stay quiet and let the Retail Investors do all of the work. They could even strategically announce that they have officially walked away from their “Short” position on the stock. It wouldn’t be false or misleading information either, but rather a matter of fact. Of course, they would do this anticipating that the announcement would only further fuel the Retail Investors rally.

So the questions that we will pose for the Retail Investors today are simple.

1. Who here really believes that the hedge funds decided to simply cut-losses, pay the price of covering their short position, and walk away?
2. Who here really believes that hedge funds would never do such a dubious thing as to buy the cheap shares when the Retail Investors were locked out?
3. Who here really believes that the hedge funds would never consider such an opportunity to recover their short position losses?

If you truly believe that the professional short-selling hedge funds didn’t plan out and use the forced 24-hour lockout of Retail Investors that was conveniently provided by Robinhood Markets as an opportunity to regain their advantage, and to re-position to recover their losses, then you don’t know Wall Street. Every event creates a reaction, and every reaction creates an event.

The lockout was a reaction to the rally event. It allowed hedge funds to cover their short positions and re-open new positions. What Retail Investors may want to consider is the possibility that the bait and switch has already occurred, and that hedge fund short selling losses are slowly being recovered at the expense of Retail Investors and their persistence to rally on the stock.