Citigroup Higher On Hedge Fund Short Squeeze

The banks are taking a beating today, but Citigroup (C) — arguably the weakest of the bunch — is up strongly. What gives?

It has to do with a shorts queeze that’s been going on for several weeks, ever since the last bailout was announce.

We explained in March:

Go back a couple of weeks ago to Citi’s (C) last government bailout. Remember that Citi’s preferred shares rallied, as investors believed that the publicly traded preferred shares were being converted to common equity at a favourable price (an inducement for guys like Prince Alwalid to play along).

Many hedge funds simultaneously went long the preferred while shorting the hell out of the common stock, causing shares to collapse. Shorting the common stock essentially inoculated the arbitrageurs from future share declines that might mess up the profitable conversion.

But there was a catch.

The government never promised that the average Joe would be able to convert their preferred to common at the same ratio as everyone else. And there was an immediate concern that when investors realised this, Citi’s shares would rally amid a massive short squeeze.

It didn’t happen right away, but that appears to be what’s gone on over the past couple of weeks, as the stock has rallied over 300%.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at