An American hedge fund that invested heavily betting on the failure of the struggling video game store chain GameStop was withdrawn after an army of small investors fired its shares and cost the financial company a fortune.
Melvin Capital Management, one of several Wall Street companies that would make money for investors if GameStop’s shares plummeted, told CNBC that it closed its short position after suffering a huge loss.
The hedge fund, which lost 30% of the $ 12.5 billion (£ 9.1 billion) it manages this year, has been overtaken by an army of Reddit users of the “Wall Street Bets” forum. The group sought to punish the financial giants that were betting against GameStop, causing the network’s shares to skyrocket.
The battle of David and Goliath attracted the attention of Elon Musk, the chief executive of Tesla and SpaceX who earlier this month became the richest person in the world, who joined the fray posted earlier this week about the company and its employees. Reddit supporters. His intervention allegedly helped the company’s stock rise 50% in Tuesday’s trading session. Musk, who is affectionately referred to as “Papa Musk” by supporters of the stock trading discussion group, tweeted the single word “Gamestonk” and a link to the Reddit group. “Stonks” is an ironic term for actions widely used on social media.
The army of dealers has declared war on Wall Street companies looking to “sell” GameStop, which involves “borrowing” a company’s shares and selling them with the intention of buying them back cheaper when the price of The company’s shares fall, and this proved that it cost them billions.
Last week, short seller Citron Research placed a bet against GameStop calling it a “retailer based on a shopping center in crisis”, and predicting that its shares would fall to $ 20 because it is “practically in terminal decline”. This prompted Reddit traders to push the retailer’s stock up, declaring, “We want to see pornography of losses”, which resulted in short sellers being caught in what traders refer to as a “gamma squeeze” from which they cannot escape.
Andrew Left, the founder of Citron, has now given up on selling shares, alleging harassment by GameStop supporters, according to CNN. Melvin Capital threw in the towel just days after raising a $ 2.75 billion bailout from funders, including Point72 Asset Management, managed by New York Mets owner Steve Cohen.
A year ago, the shares of 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 1. GameStop supporters are now in victory mode, as the market value of the shares has reached $ 22 billion. American gambling website MyBookie called it “short squeeze of the century” and estimates that GameStop shares are on track to reach $ 420 per share in April.
Amateur traders have boasted of their victories, and one of them said to the Reddit forum: “Now I can write a check to my mom and put my sister on lymes [disease] treatment.”
The meteoric rise was fueled by small investors snapping up stocks when they were cheap, using the Robinhood trading app and other services, seeing this as an opportunity to make money if the company can recover.
Small investors began to pile up last September, after Ryan Cohen, founder of online pet food giant Chewy, took a 13% stake in GameStop and started lobbying for it to go digital and become one. Amazon’s serious rival.
However, analysts warn of concerns about a potentially unsustainable bubble emerging behind gossip about real financial performance.
“Amateur investors on the social media platform Reddit are waging a battle with the hedge funds that are short selling GameStop and several other stocks, including Blackberry and Virgin Galactic,” said Russ Mold, chief investment officer at AJ Bell. “[This] raises fears about a bubble in the markets, as these actions are being supported by little tangible news. “