Melvin Capital Management had been betting against GameStop Corp. since 2014 and still believes that online video game downloads will surpass the retailer’s business model, the hedge fund’s founder said in an early copy of his testimony in Congress released on Wednesday.
Gabe Plotkin’s Melvin Capital lost more than 50% in its investments in January, as losses accumulated in its short bets against GameStop and other companies. GameStop was praised on the Reddit WallStreetBets forum and on some other social media platforms, with rising stock prices detracting from the returns of several high profile companies, including Steven A. Cohen’s Point72 Asset Management and Daniel’s D1 Capital Partners Sundheim.
The action at GameStop was fueled in part by an army of optimistic individual traders urging each other on platforms like Reddit to buy stocks and options and squeeze Melvin, a specific target on the posters. GameStop’s seemingly relentless upward march also created what traders described as a kind of contagion effect. Managers lost confidence in their short positions and hedged those bets, while cutting their stakes in other companies to reduce the risk in their portfolio.
GameStop’s seemingly relentless upward march also created what traders described as a kind of contagion effect, with managers losing confidence in their short positions and covering those bets. These managers have also reduced their holdings in other companies to reduce the risk in their portfolios.
The episode raised doubts about the market’s integrity and triggered federal investigations into possible market manipulation. Promoters have subpoenaed information from brokers like Robinhood Markets Inc., the popular online brokerage that many individual investors use to trade GameStop and other stocks.