A US hedge fund heavily invested in the failure of struggling video game retailer GameStop has pulled out after an army of small investors surged its shares and cost the financial company a fortune.
Melvin Capital Management, one of a number of Wall Street companies looking to make money for investors when GameStop’s stock plummeted, has told CNBC it closed its short position after a massive loss.
The hedge fund, which has lost 30% of the $ 12.5 billion (£ 9.1 billion) it manages this year, was outmaneuvered by an army of Reddit users of the “Wall Street Bets” forum. The group tried to punish the financial giants who gambled against GameStop by increasing the chain’s stock.
The battle between David and Goliath has caught the attention of Elon Musk, the CEO of Tesla and SpaceX who became the richest person in the world earlier this month, who posted a tweet about the company and its Reddit supporters earlier this week. His intervention reportedly surged the company’s stock by 50% in after-hours trading on Tuesday. Musk, 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 stocks commonly used on social media.
Elon Musk
(@Elon Musk)Gamestonk !! https://t.co/RZtkDzAewJ
The army of traders has declared war on Wall Street companies who want to ‘short’ GameStop, which means that they ‘borrow’ and sell a company’s stock with the intention of buying them back cheaper when the company’s stock price falls , and it has been proven that cost them billions.
Last week, short-seller Citron Research placed a bet against GameStop calling it a “failing retail chain,” predicting its stock would fall to $ 20 as it is “virtually in decline.” It prompted the Reddit merchants to push the retailer’s stock through the roof, stating, “We want to see the loss porn,” which led to the short sellers being caught doing what merchants call a “gamma squeeze” to which they cannot escape.
According to CNN, Andrew Left, the founder of Citron, has now given up the stock by citing harassment by GameStop supporters. Melvin Capital threw in the towel just days after raising a $ 2.75 billion bailout plan from lenders, including Point72 Asset Management, run by New York Mets owner Steve Cohen.
A year ago, GameStop’s stock, which plans to close 450 stores this year, traded at $ 3.25 each. Now the 37-year-old chain is one of the hottest stocks on Wall Street at $ 324, up over 700% since Jan. 1. GameStop supporters are now in victory mode as rising stocks have seen its $ 22 billion market value rise. US gambling site MyBookie called it the “short squeeze of the century” and estimates GameStop’s stock is on track to hit $ 420 per share by April.
Amateur traders are proud of their wins, one of which told the Reddit forum, “I can now write my mom a check and put my sister through the lymes [disease] therapy.”
The rapid rise was fueled by small investors who picked up the stock when it was cheap, using the trading app Robinhood and other services, who saw it 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 began lobbying to use it digitally and become a serious rival to Amazon.
However, analysts warn of concerns about a potentially unsustainable bubble emerging as a result of gossip about actual financial performance.
“Amateur investors on social media platform Reddit are in a battle with hedge funds shorting GameStop and several other stocks, including Blackberry and Virgin Galactic,” said Russ Mold, investment director at AJ Bell. “[This] raises fears of a bubble in the markets, as these stocks are supported by little tangible news. “