Following on the dirty hedge post immediately below, this is more akin to a "Texas-hedge" by Reddit management. Unlike a hedge which (theoretically) reduces exposure, a Texas hedge increases exposure to risk. There are many explanations of the origin of the term but the one time I saw it put into action was when a trader was long an equity option position and bought the underlying to goose the option into the money for what reason I know not. That same guy used to mark the close on positions that were close to getting him a margin call, a different form of increasing your risk and illegal in most jurisdictions, further increasing your risk.
The reason the Reddit management's game-plan increases their risk is if the stock goes south after the IPO they will not only have a loss but also have a bunch of their power-users angry with them. Power-users who have a platform they can use to vent/cathart or boycott as they may see fit.
Years ago I mentioned a gentleman who understood risk and understood it in terms of variance (and more importantly semi-variance. More on that after the jump.
From The Verge, the headline story, February 22:
In an unusual move, the company is giving its most active users the chance to purchase shares in its upcoming IPO. ‘I have never been more excited about Reddit’s future than I am right now,’ says CEO Steve Huffman.
On Thursday, Reddit filed its S-1 registration statement with the SEC detailing its finances and business goals ahead of its imminent initial public offering on the New York Stock Exchange under the symbol RDDT.
In its S-1 document, Reddit said it made $804 million in revenue last year, the vast majority of which came from advertising. However, the company is unprofitable, with a net loss of $90.8 million in 2023.
In an unusual twist, Reddit is also giving an unspecified number of its top users, including moderators and those with high karma scores, the chance to buy shares in its IPO. That’s a privilege usually reserved for professional investors who want to buy stock at a theoretically lower price before everyone else gets to purchase it on the public market.
Reddit will allocate shares using a tiered system beginning with “certain users and moderators identified by us who have meaningfully contributed to Reddit community programs.” After that first tier, people with a karma score of at least 2,000 and those “who have performed at least 5,000 moderator actions” will be invited to purchase shares....
....MUCH MORE
Previously:
And back to risk reduction March 10, 2019:2017 -"Reddit raised $200 million in funding and is now valued at $1.8 billion"
And February 18, 2024 - "Ahead Of IPO Reddit Has A New AI Training Deal To Sell User Generated Content"
"Is semi-variance a more useful measure of downside risk than standard deviation?"
In Friday's "And Speaking of Black Goo: 'Norway’s $1tn wealth fund set to cut oil and gas stocks'" I included a story that touched on diversifying your investment risks away from the risks associated with your personal income-generating activities:
...A couple years ago I mentioned to a friend one guy's approach to dampening the sine wave of risk:
...During the dotcoms I knew a fund sub-adviser who would take his bonus checks and buy equity-indexed-annuities with a 3% annual guarantee, not to annuitize but for the accumulation.Unfortunately the semi-variance link had rotted.
He's probably beaten 90% of active managers over the last decade although I don't know if that would preserve real principal over the next ten years.
His specialty was biotechs and he wanted to reduce the semi-varience of his life....
Here is the target the link was supposed to be aiming at.
From Dimensional Fund Advisors Fama (EFF)—French (KRF) Forum:
EFF/KRF: In his classic 1959 book that defined modern portfolio theory, Markowitz considers the semi-variance as a potential measure of risk. Interest in the semi-variance fell by the wayside among academics because, at least for short holding periods (e.g., monthly), distributions of returns are rather symmetric. For symmetric distributions, the true variance and semi-variance are interchangeable, but because all the data are used to estimate the variance but only negative returns are used to estimate the semi-variance, estimates of variance are more accurate than estimates of semi-variance. For longer holding periods (e.g., a year or more), distributions of returns are right skewed, and no single measure of dispersion (e.g., the variance or the semi-variance) summarizes the overall risk of the distribution.If yous see them together at some Chicago dive bar, Fama is the one with the Nobel around his neck, French the one saying "For Chrissakes Gene."
Let's now examine whether you really believe what you say about your client's tastes. In our (academic) terms, your statements imply that your clients are risk neutral on the upside but risk averse on the downside. If this is the case, the semi-variance, which ignores upside risk, is probably a better single measure of risk than the variance, but the conclusion is subject to the caveats above about the skewness of return distributions for longer return horizons....MORE
For more on semi-variance here's 2014's "The Equation that Will Change Finance"
