A US hedge fund that has invested heavily in the failure of the struggling video game chain GameStop has moved in after an army of small investors soared its shares and cost the financial firm a fortune.
Melvin Capital Management, one of a number of Wall Street businesses that would make money for investors if GameStop’s shares fell, told CNBC it closed its short position after taking a big loss.
The hedge fund, which lost 30% of the $ 12.5 billion (£ 9.1 billion) it handles this year, has been postponed by an army of Reddit users from the Wall Street Bets forum. The group tried to punish the financial giants betting on GameStop by raising the chain’s shares.
The David and Goliath battle has caught the attention of Elon Musk, the Tesla and SpaceX CEO, who became the world’s richest person earlier this month. His intervention allegedly increased the company by 50% on Tuesday. Musk, affectionately referred to as ‘Papa Musk’ by supporters in the stock trading discussion group, tweeted the single word ‘Gamestonk’ and a link to the Reddit group. “Stonks” is a tongue-in-cheek term for stocks widely used on social media.
The Army traders have declared war on the Wall Street companies who want to ‘short’ GameStop, which means they have to borrow and sell a company’s shares with the aim of buying them back cheaper when the share price falls, and it turns out that costing them billions.
Last week, short seller Citron Research called a bet against GameStop that it was a “failed mall-based retailer” and that the stock’s forecast would drop to $ 20 because it was “reasonably in terminal decline”. This prompted the Reddit traders to push the retailer’s stock through the roof, declaring: ‘We want to see the loss porn’, which led to the short sellers being caught in what traders call a ‘gamma pressure’ from which they can not escape.
Citron founder Andrew Left has now given up, according to CNN, on short-circuiting the stock calling harassment by GameStop fans. Melvin Capital threw in the towel a few days after collecting a $ 2.75 billion bailout from supporters, including Point72 Asset Management, run by New York Mets owner Steve Cohen.
A year ago, shares in GameStop, which plans to close 450 stores this year, traded at $ 3.25 each. The 37-year-old chain is now one of the hottest stocks on Wall Street trading at $ 324, up more than 700% since January 1st. GameStop fans are now in a win-win mode as the market capitalization reaches $ 22 billion. The American betting website MyBookie, which it calls the ‘short print of the century’, and reckons GameStop’s share is on track to reach $ 420 per share by April.
Amateur traders brag about their victories, and one tells the Reddit forum: ‘I can now write a check for my mother and glue my sister through [disease] treatment. ”
The meteoric rise is fueled by small investors who took up the stock when it was cheap, using the trading app Robinhood and other services, and saw it as an opportunity to make money if the company could recover.
Small investors began piling up last September after Ryan Pet, founder of online pet food giant Chewy, took a 13% stake in GameStop and began lobbying for it to go digital and become a serious competitor to Amazon.
However, analysts warn about concerns about a potentially unsustainable bubble emerging from the gossip stories about actual financial performance.
“Amateur investors on social media platform Reddit are battling hedge funds that include GameStop and several other stocks, including Blackberry and Virgin Galactic,” said Russ Mold, investment director at AJ Bell. ‘[This] raises fears about a bubble in the markets as these stocks are backed on little tangible news. ”