How Billionaires Cash In On Short Squeezes

In the financial jungle, a short squeeze is a lion lurking in the tall grass, unseen but deadly. For the uninitiated, a short squeeze occurs when a stock’s price soars unexpectedly, forcing traders who have bet against the stock—those who are “short” on it—to buy shares at higher prices to mitigate their losses.

The rush to buy further inflates the stock price, creating a feedback loop that can send shares skyrocketing. It’s a thrill ride for some, a disaster for others, and an opportunity for the billionaire big-game hunters of Wall Street.

Anatomy of a Short Squeeze

A short squeeze isn’t a random phenomenon; it’s the product of a delicate ecosystem of investor psychology, market mechanics, and share availability.

It usually starts when investors identify a stock they believe is overvalued. They borrow shares and sell them, betting the price will go down. If the price does drop, they can buy back the shares at a lower cost, return them, and pocket the difference. Simple, right?

Well, there’s a twist. If too many investors short the stock, and the price starts to rise instead of fall—often due to some positive news or a bullish market trend—the short sellers scramble to buy shares and cover their positions. This frantic buying can lead to a short squeeze.

The Billionaire Short Squeeze Playbook

So how do billionaires navigate these treacherous waters? Contrary to popular belief, many are not just spectators in the arena; they are the gladiators wielding tridents and nets.

Some actively create the conditions for a short squeeze by using social media and their vast networks to disseminate favorable news or opinions about a stock they already own, thereby encouraging buying.

Take the case of Bill Ackman, the founder of Pershing Square Capital Management. In 2012, he made a $1 billion short bet against Herbalife. After disclosing his position, he launched a vigorous public relations campaign to discredit the company.

Carl Icahn, another billionaire investor, decided to take the opposite stance, thus inciting a short squeeze that ultimately forced Ackman to cover his shorts at a significant loss.

The GameStop Saga

GameStop, the struggling retailer became the eye of a financial hurricane in early 2021.

When retail investors, orchestrated through social media platforms like Reddit, began buying up GameStop shares, they set off one of the most monumental short squeezes in history. And guess what? Billionaires were not just sitting on the sidelines.

Ryan Cohen, the co-founder of Chewy, had a 13% stake in GameStop. His involvement was seen as a catalyst for the stock’s initial uptick, and many attribute part of the short squeeze to his strategic moves within the company.

Hedge funds like Melvin Capital, which had significant short positions in GameStop, faced billions in losses.

On the flip side, other hedge funds like Senvest Management LLC reaped a windfall by going long on the stock before and during the squeeze.

Short Squeezes Are A Double-Edged Sword

Short squeezes are financial rollercoasters, and like any thrill ride, they come with both exhilaration and stomach-churning drops.

Hedge funds and billionaires, with their massive resources and real-time data analytics, are in a better position to maneuver through this volatile landscape.

Take Elon Musk for instance. A tweet from him can send stocks soaring or plummeting. While the Tesla CEO has never publicly stated that he’s cashed in on a short squeeze, his influence demonstrates how billionaires can wield social media as a potent weapon in these financial skirmishes.

However, the strategy is not without risk and the wrong move can backfire spectacularly, resulting in gargantuan losses.

What the SEC is Watching

Now, this all sounds like a high-stakes poker game, but where does legality come in?

The SEC keeps a close eye on manipulative conduct that artificially affects the price of a stock. However, proving manipulation is a tall order. Market sentiment, after all, is a murky water to wade through.

While the SEC hasn’t cracked down hard on any billionaires for manipulating short squeezes, the regulatory environment is something every smart investor should monitor closely.

Tracking Billionaire Moves in Recent Short Squeezes

At Financhill, we can keep an eye on how the billionaires are navigating recent short squeezes.

For instance, during the AMC short squeeze, several hedge funds increased their stakes in the company, making calculated exits as the stock reached its peak, netting impressive profits.

The data provides retail investors with insights into strategies that they can consider for their investment decisions.

The Future of Short Squeezes 

In a world driven by data analytics, real-time information, and social media, short squeezes are increasingly becoming a part of the financial landscape. Yet, they’re not for the faint of heart or shallow of pocket.

Short squeezes have democratized financial markets in many ways, allowing retail investors to challenge institutional giants. However, let’s not kid ourselves: in this David vs. Goliath battle, Goliath is often still winning.

Billionaires, with their formidable resources and information networks, are generally the ones who capitalize most effectively on these market anomalies.

Short squeezes are as unpredictable as they are exciting, and as long as there are markets, there will be market frenzies.

Understanding how billionaires play this game can offer retail investors valuable insights into how to navigate the choppy waters of high-risk, high-reward investing. But remember, if you’re planning on hunting lions, you better be well-equipped.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.