This hedge fund won $ 700 million on GameStop

The rise of GameStop is often seen as a triumph of amateurs over professionals. What it was, to some extent. But it was also a negotiation that pitted professionals against other professionals – and few made more money than Senvest Management LLC, the firm of Messrs. Mashaal and Gonick.

“When he started his march, we thought, something was infiltrating here,” said Mashaal, 55. “But we had no idea how crazy this thing was going to go.”

Senvest’s interest in the video game retailer was sparked by a presentation by GameStop’s new chief executive at a consumer investment conference in January 2020.

At the time, most Wall Street analysts rated the video game retailer as “suspend” or “sell”. The stock was also heavily sold. Mashaal and Gonick would come to know that some of the highest-yielding hedge funds on Wall Street, including Melvin Capital Management, were pessimistic in stocks due to regulatory disclosures.

But while talking to management, discovering competitors and observing the involvement of activists in the actions, including Chewy Inc. co-founder Ryan Cohen, they finally started buying. At the end of October, Senvest owned more than 5% of the company, paying less than $ 10 per share for most shares.

They thought that if GameStop could hold out until the next generation of video game consoles emerged and increased demand for games and accessories, the company would have a boost. And they reasoned that if Cohen could help transform GameStop from a basically physical operation into an online gaming destination, the company could be worth much more.

Messrs. Mashaal and Gonick had been on the wrong side of short grips at Senvest before. One case was with opioid maker Insys Therapeutics Inc., although they made money from their short position. GameStop’s stock could skyrocket if caught in a situation where its rising price would force downward investors to start repurchasing stocks to contain their losses, they thought.

GameStop is now Senvest’s most profitable investment for dollars earned and its internal rate of return – a performance metric that takes into account the duration of an investment. This boosted the company’s main stock pick fund from $ 1.6 billion in late 2020 to $ 2.4 billion. For the month of January, the fund returned 38.4% after rates.

The dominant narrative coming out of January so far has been the reversal of the natural hierarchy on Wall Street, with hedge funds dealing with considerable losses and individual investors blushing with victory after coming together to raise the price of a handful of shares previously left to die. But even before this week’s weakening in the rally, the reality was more nuanced.

Mudrick Capital Management LP, a New York hedge fund with more than $ 3 billion that provided a lifeline for AMC Entertainment Holdings Inc.

in December, it made nearly $ 200 million mainly at AMC in January. The cinema chain, which was battling bankruptcy, was one of the darlings of retail recently.

Mudrick’s earnings come mainly from its holdings in AMC’s debt, which rebounded last week with the increase in AMC’s share price. The fund also made about $ 50 million by launching and selling options to buy AMC and GameStop shares owned by it.

PlusTick Management in Charlottesville, Virginia, which manages a stock and bond selection hedge fund that manages about $ 120 million, gained 20% in January, an investor said. Part of its earnings came from existing stakes in companies like BlackBerry Ltd.

and the beleaguered owner of a Macerich shopping center Co.

Both companies have been praised in forums recently.

“You always pinch yourself until the last day of the month to see if you can handle it,” said partner Adrian Keevil.

Other funds have started trading GameStop’s weekly call options and have profited in some cases, traders said. Given the volume of shares and options traded on GameStop and other names, they say, individual investors have driven only part of the activity.

“It’s not just the little people on the long side here. There are great players playing both sides of the GameStop, ”said Thomas Peterffy, president of Interactive Brokers Group Inc.

Senvest Management was founded in 1997 by Mr. Mashaal with an investment from Senvest Capital of Montreal,

your father’s investment firm. Mr. Gonick, his former college roommate, joined as co-director of investments in 2008.

Senvest invests in 25 to 30 companies at the same time. The pair describes the fund as an opposing investor, focused on investing in value, or on the discipline of buying cheap stocks that they think will eventually generate higher returns. They say they actively discourage their team from participating in dinner parties and socializing with others in the industry, which, they say, leads to group thinking and crowded positions.

The main hedge fund averaged around 18.3% per year for investors through January, according to a person familiar with the fund. It is also highly volatile. It lost 24.1% in 2018, but made 18% the following year, according to an investor document.

Senvest’s approach does not mean that they are above talking to other people about investment ideas when it works to their advantage.

Brian McGough and Jeremy McLean are analysts at Hedgeye Risk Management, a company in Stamford, Connecticut, which sells independent research to institutional and individual investors.

On December 17, when GameStop shares closed at $ 14.83, the pair announced that they were adding GameStop to their long list of “best ideas”. The following week, they gave an hour-long presentation explaining why they thought the stock might be worth $ 100.

Without the knowledge of Hedgeye’s customers, Senvest recently introduced GameStop to Hedgeye, presenting its thesis to the stock.

A person familiar with Senvest said that Hedgeye made an independent call to recommend GameStop. Still, in doing so, Senvest probably played a role in pushing some individual investors to GameStop.

“I respect Senvest a lot,” said McGough. “We examined it independently and came to a similar conclusion.” He said that “it is not terribly common” to have ideas launched.

As soon as the rally at GameStop started, a steady pace of development made Messrs. Mashaal and Gonick start thinking about giving up on the stock. The two men were glued to their screens tracking the action. They surfed or used snowshoes to vent.

When Citadel LLC, Citadel Partners and Point72 Asset Management invested $ 2.75 billion in Melvin Capital, which was suffering huge losses, Messrs. Mashaal and Gonick suspected that Melvin had stepped out of his position at GameStop and wondered what the momentum was of the left shorts cover.

After the market closed on January 26, Tesla Chief Executive Elon Musk tweeted “GameStonk !!” a rallying cry for users of Reddit’s WallStreetBets forum, who gave their support to GameStop.

Senvest, which was gradually cutting its position, decided to leave completely.

“Given what was going on, it was hard to imagine it going any further crazy,” said Mashaal.

On Wednesday afternoon, the company shared news of its robust GameStop profit with its customers.

Despite the bullish drop this week, Senvest said GameStop’s story will change a part of how they do business: the company will pay close attention if individual investors are discussing a stock on message boards before betting on or against it.

“I didn’t expect this impact to end,” said Gonick.

—Geoffrey Rogow contributed to this article.

Write to Juliet Chung at [email protected]