Can (did already) the GME-related hedge funds cover the $5 billion?

Equity trades in the US are settled on T+2 basis, meaning that the actual exchange of stocks vs money occurs on the second working after the order is executed. Assuming the short positions were closed on Jan 13-15 as reported in the press, the trades cleared by Tuesday, Jan 19. The clearing agency for stocks is DTCC which is regulated. The DTCC establishes risk metrics and collects the collateral from its members required for stock clearing. Hedge funds go bust once in a while but brokers, especially prime brokers, who are DTCC customers are pretty good at risk management and ensure that the customers (hedge funds) maintain the necessary margin. If the net asset of the customer goes below the specified threshold, they issue margin calls.

The losses may be $5 billion but it's possible that not all of the losses have been realized and some of it is still on paper (some of the short positions are still open) - likely ones added later on during the short squeeze).

It's possible that there are options in the mix, allowing someone to maintain losing open positions while not totally losing their shi_t (that's shirt!), but still taking a beating.

It's also possible to improve one's margin and stave off a margin call by buying back a portion of a short position. That effectively infuses some capital and slows the rate of loss since it becomes a smaller overall position.

One of the big losing players in this was the hedge fund Melvin Capital. On Monday, it was reported that Melvin received $2.75 billion from Citadel and Point72 Asset Management (other hedge funds) to meet its massive margin calls.

In regard to margin, in general, hedge funds are no different than us. If their holdings drop below the (MMR) minimum margin requirement (Reg T is 30% for shorts but some brokers have raised it), they get a margin call. Unlike us, they're not likely to be sold out immediately because they can quickly obtain a line of capital or a cash infusion (see above) and easily to meet the margin call. I won't say that hedge funds can't reach negative equity but they can survive better than we can. However, don't think for a moment that a hedge fund's broker is going to allow them to maintain open positions when MMR keeps dropping, eg. to 15%, 10%, 5%, etc. before beginning to shut them down.

Stay tuned because in the next few weeks there will probably be a lot of war stories as the media provides greater details.

If Hedge Fund doesn't have the money and goes bust, "what happens"? Who loses, a brokerage? Individual traders? Government bail out?

Their broker is liable for the shortfall. 'You' don't ever buy and sell shares. Your broker does the buying and selling with other brokers, on your behalf. And they have to guarantee every single trade that they do.

Brokers, like banks, are required to hold a certain amount of capital to make sure they don't go under. If a Broker loses more money than they have, then things get messy. Probably some combination of the regulator/government/other brokers end up footing the bill.

Can a Hedge Fund (well, any big player) bust through their margin and not be able to pay up? (Or is that conceptually impossible for some reason I don't understand?)

It's the broker's (and the hedge fund's) job to make sure they don't (seeing as they're the ones who'll be liable). I imagine, for massive players, they'll give you more leeway than some tiny retail account. But ultimately if prices move violently and unexpectedly, it could happen.

But even if it does happen. Chances are if you were running a massive hedge fund, you got that way by being very good at what you do. So there are probably outside players who would be willing to bail you out in return for a stake in your fund/company.

A great example would be Knight Capital Group. 10 years ago, they were the largest trader for US equities. Through a series of unfortunate events related to a software update, their algorithmic trading software went haywire one morning. Over the course of 45 minutes of trading on August 1 2012 they lost $440 Million, which was enough to virtually bankrupt the company.

They raised $400 Million from a group of investors to plug the hole, and ended up being acquired just 4 months later.