Tag Archives: stock market

Are these signs of a hedge fund blowing up?

A hedge fund might be blowing up the economy. Sure, there are real pricing swings based on expectation of the upcoming financial crisis, but the dramatic nature of the swings and the frequency of them is, well, unusual when it comes to being organic.

Long Term Capital Management, among other things, was brought down by a convergence trade strategy gone wrong: The idea to short the expensive on-the-run treasurys and buy the cheaper off-the-run treasurys and wait for them to converge made sense as a low-risk thing to do, even if there wasn’t a lot of money in it. By using a lot of leverage, they could boost the return on something that seemed so safe.

That whole thing blew up when people wanted the safest, most-liquid thing around (i.e. on-the-run treasurys) to the detriment of everything else. That hurt LTCM really bad as the spread grew wider instead of converging.

Let’s look at the 2-year treasury now and the 10-year treasury.

https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD02Y retrieved on 11/5/2022 at 6:50pm PT
https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD10Y retrieved on 11/5/2022 at 6:50pm PT

You should need encouragement to lock your money up for longer. Therefore, the yield on the 10-year should be greater than the yield on the 2-year. Historically, that’s the way it’s been:

https://ycharts.com/indicators/10_2_year_treasury_yield_spread retrieved 11/5/2022 at 6;55pm PT

But that’s not the sitch now, as you see in the chart above. Since July 2022, the spread has flipped. It’s now more lucrative to buy the 2-year than it is to buy the 10-year. You have a disincentive to buy the 10-year just in terms of the yield.

And the spread is more than 50 basis points. Yes, there has been a slight move toward convergence, but this is still out of wack.

It could be a convergence trade a fund has done that has gone horribly, horribly awry–and even more so if it’s a highly levered trade. It could be that they have had to vacate all kinds of short and long positions to meet margin calls. That would explain wild fluctuations in prices of things across sectors and the quick subsequent rebounds.

The economy may still be screwed. But could it be that a hedge fund has blown up in a really bad way and the rest of us just don’t know it yet?

Day 4 of the EVFM Short Squeeze (midday post)

Disclaimer: None of this is investment advice. The logic here may be bad and should not be relied upon. My assumptions may be bad and should not be relied upon. This post reflects my opinion.

Yesterday I posted about how I think that we’re in the Fight for the Dollar stage of this short squeeze. Some more details: Evofem had gotten a deficiency letter from NASDAQ because EVFM had closed under $1/share for 30 days in a row. NASDAQ gives a 180-day period to get back into compliance, which means closing at $1 or above for 10 consecutive days of trading.

EVFM closed on Monday and Tuesday of this week at $1.07. That’s two days out of the 10 necessary!

Based on activity over more than a year, I figured that the short sellers are doing what they can to depress the price and force noncompliance. Now that there’s a short squeeze, it’s even more important for them to stop a push for that $1 at the end of the day.

My conclusion from yesterday is that all stock priced below $1 is underpriced when there’s a counter-push to make absolutely certain that it closes at a minimum of $1.

I decided to test this out earlier this morning by buying additional shares from $0.94 all the way down to $0.82. I could buy at all those prices because it kept falling. I thought the risk of being incorrect is nonzero but low. After all, I believe Phexxi is a game-changer, and recent news that a major pharmacy benefits provider is willing to pay for it is super encouraging.

As of writing this post, the price has climbed to above $1–which is consistent with my $1 floor expectation–and then has dropped down some–which is consistent with my short-sellers-want-it-to-close-below-$1 expectation.

There’s plenty of day left, but if today closes at $1+, that will mark 3 of the 10 consecutive needed to get rid of that exclamation point noncompliance icon.