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Home » Popular Markets » Equities » DWAC and Trump: why hedge funds are starting to short this SPAC

In his four years as president, fact checkers documented 30,573 false or misleading statements made by Donald Trump – making it ironic that the Trump Media & Technology Group is gearing up to launch a new social media platform called “Truth Social.”

Yet, that irony hasn’t stopped speculative retail investors, die-hard Trump supporters and even a few Republican members of Congress from diving into the stock that will ultimately house the new social media platform and driving up its price.

When it comes to investing for the long-term, however, investors should think twice.

Following the announcement that the Trump Media & Technology Group (TMTG) has agreed to a deal to bring the company public through a merger with Wuhan, China-based special purpose acquisition company Digital World Acquisition Corp. (Nasdaq: DWAC), shares of the stock soared.

DWAC, which closed at $9.96 per share on October 20th prior to the news, opened the following morning at $118.79, rising as high as $175 before closing at $94.20. At its high point, the stock was up a whopping 1,657% from its pre-announcement trading price. Since then, while trading activity in the stock remains strong, it has already given back 63% of those short-lived gains, closing its most recent day of trading on October 27th at $64.89.

Despite DWAC’s early surge, investors should not lose sight of the fact that they are ultimately investing in a SPAC, as well as the reality that Trump’s business track record is far from what he touts it to be.

“It’s a scam with very low odds of long-term survival. It may deliver a dead-cat bounce or another short-lived spike as a new wave of gullible gamblers rushes in, but ultimately it’ll just go down – and fast,” said Grigory Lukin, a former financial analyst for Amazon and author of the Let’s Retire Young blog. “Tragedies like DWAC happen when too many average people get caught up in the mania,” he said.

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Creating a rival for the liberal media consortium

According to the Trump Media & Technology Group, the company’s mission is “to create a rival to the liberal media consortium and fight back against the ‘Big Tech’ companies of Silicon Valley, which have used their unilateral power to silence opposing voices in America.”

Just as the company expected, that claim immediately resonated with long time Trump supporters who believe the former president has been unfairly blocked from major social media platforms such as Twitter (NYSE: TWTR) and Facebook (Nasdaq: FB), and who subsequently flocked to commission-free retail trading platforms like Robinhood to get in on the action. Retail investors enthusiastic about the prospects of Truth Social took to social media platform Reddit to drum up enthusiasm for DWAC, so much so that it was the most heavily discussed stock in the platform’s WallStreetBets group, which has fuelled massive spikes in other meme stocks like GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings, Inc. (NYSE: AMC).

And interest in the stock among die-hard Trump supporters was only furthered when news broke of an investment of up to $50,000 by Rep. Marjorie Taylor Greene (R -GA), whose allegiance to Trump and ties to the January 6, 2021 Capitol riot have made her an extremely controversial figure in Congress.

But while an initial pop and surge of interest in DWAC was to be expected, particularly given the allegiance of Trump’s hard-core supporters, retail interest will not be enough to sustain the stock’s price long-term – particularly when inexperienced investors that benefited from immediate gains start to see them wane. And that is exactly what experienced investors are betting will happen.

Fund managers are getting out of DWAC now

On October 25, Iceberg Research, which purports to identify significant earnings misrepresentations and accounting inconsistencies in public companies, announced to the market via Twitter that it is shorting DWAC.

While high profile hedge fund investors including Saba Capital Management and Lighthouse Investment Partners, both unloaded their holdings in the DWAC SPAC immediately after learning about the TMTG deal. In the case of Saba, founder Boaz Weinstein credited the firm’s move to the fact that the TMTG deal did not align with its values.

Advisory firm Barclay Pearce Capital also warned investors to steer clear of the stock through an investor note: “At current trading levels, the implied merger valuation (of DWAC/TMTG) is $8.2 billion, which is not far off the $9.2 billion valuations for the New York Times – and all for a company with no revenue, no organizational structure and no product,” wrote the advisory firm. “For $8 billion, investors are acquiring plans and aspirations to build a right-wing, Twitter-like platform called ‘Truth Social.’ Given Trump’s cult-like following in the United States, this isn’t a surprising outcome. But it would be a pretty safe bet to assume that this isn’t going to end well for investors.”

Among other red flags that industry experts point to are the fact that while creating a social media network to rival the likes of Twitter and Facebook may sound impressive, executing on that promise is another thing and will be extremely difficult. The idea of a Trump-backed social networking platform may sound intriguing to extremist Republicans, but if usage of Truth Social is limited to that group it will not be enough to sustain such an initiative, let alone make it any real rival for existing social media behemoths.

To see that reality, one needn’t look any further than conservative social media platform Parler, which had a high of only 15 million users before it was forced to shut down when Inc. (Nasdaq: AMZN), Apple Inc. (Nasdaq: AAPL) and Alphabet Inc.’s Google (Nasdaq: GOOGL) removed it from their own platforms in early January over its role in the Capitol riot. Comparatively, Facebook currently boasts around 2.89 billion monthly users, while Twitter has 206 million active users.

“Social media is a tough needle to thread. Parler and other would-be replacements to the current juggernauts in the industry have been lackluster, at best,” said Nicholas B. Creel, a professor of Business Law at Georgia College and State University. “Not to mention that anything backed by Trump will alienate a substantial portion of the population, particularly the younger and more tech savvy generations, making it hard for the platform to build numbers.”


This article is not investment advice. Investors should do their own research or consult a professional advisor.

Britt Tunick

Britt Erica Tunick

Britt Erica Tunick is an award-winning US-based writer with in-depth experience writing about the alternative investment industry and virtually every aspect of finance. She has spent more than two decades writing extensively about finance, most recently as a senior writer for AR Magazine (Absolute Return & Alpha), where she wrote cover stories and in-depth profiles on many of the hedge fund industry's biggest and most influential firms, as well as comprehensive features on a range of topics pertinent to the alternative investment industry.

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