New Safety Net For Hedge Funds

Taking opportunity by the seat of the pants, Ming will clean up with his new adult diaper service for hedge funds short Dendreon. Their prime brokers loan them funds that result in leverage of ten or more times capital. Postulate these funds collectively have $500 million of capital, allowing them to have $5 billion worth of net positions. Now, the total short interest in Dendreon inclusive of on and off shore naked shorts is unknowable as is the degree that those positions are hedged. So just for exposition's sake assume their net exposure is being short 30 million shares at an average price of, say, $8 and change a share. Thats about $250 million or 5% of their collective portfolios. Sounds like reasonable exposure. But the binary event at Interim, if successful, could instantly transmute this $5 stock to a $20 market price. That's about a $360 million loss($20-$8 x 30 mil). That $360 million is a hit to capital, reducing $500 million to $140 million. At 10 to 1 leverage their $5 billion portfolio would have to be immediately liquidated by $3.6 billion to allow their $140million of capital to still carry $1.4 billion at 10 to 1 leverage, even if they were still being allowed that much leverage. These funds could implode and lucky Ming's adult diaper service would be there to catch the fallout. So just send your investment dollars to Ming with a short note saying that you understand there will soon be a mess in the shorts and you would like to use that opportunity to clean up and wiping away your losses in the end.