Isn't this complicated a bit by the way shorts work? Like when you buy $n of stock, it is impossible to lose more than $n. But with shorting you could lose unpredictable amounts if shit hits the fan. I agree it's not a good look for a hedge fund to have put themselves in this position, but I think it was more about believing they couldn't lose so extraordinarily badly, not that they couldn't lose at all.
I know this has been discussed elsewhere, and it's kind of against the narrative, but my understanding is that typically if you're shorting like this, you would hedge your potential losses by buying calls. Ie, if you short at $20/share, and want to limit to 100% losses (excluding premium), you could buy calls at $40. If the price skyrocketed past here, you have the calls.
There is obviously much more complex math to optimize this.
I'm not entirely sure that I believe the story that a large fund like this didn't have some sort of protections in place (even if the WSB community couldn't find them).
It's also possible that they did have protection in place, but instead of using it to exit their position earlier chose to sell the protection for a quick gain (thinking that the price was going to drop again after the first jump).
To me, that just says they shouldn't be betting money against potentially unlimited losses, especially without the kind of fallbacks that @nrmitchi describes.
