Hedge Funds Take Huge Losses From GameStop Rise

White House is 'monitoring the situtation'
By Rob Quinn,  Newser Staff
Posted Jan 28, 2021 7:57 AM CST
Hedge Funds Take Huge Losses From GameStop Rise
GameStop still plans to close around 450 stores this year.   (AP Photo/Jeff Roberson, File)

Two major players have admitted defeat in the "David and Goliath" battle over GameStop's share price—but other Goliaths have made a fortune. The stock surged to a new high of $347.51 at the close of trading Wednesday, up almost 135% for the day, making a profit of around $2 billion for the firm's largest three shareholders, and smaller profits for a horde of others, the Guardian reports. On Tuesday, two of the short-sellers targeted by an army of Reddit users closed their positions after taking major losses, reports CNBC. Andrew Left of Citron Research said the loss had been "100%." Melvin Capital is believed to have lost billions on its bet that the retailer's share price would drop, but fund manager Gabe Plotkin said rumors of a bankruptcy filing were untrue. More:

  • What happened? NBC explains how the struggling video game retailer became Wall Street's hottest stock, rising more than 8,000% in six months. The frenzy began when amateur investors on the Reddit r/wallstreetbets community and other forums began buying stock and pushing the price up. Hedge funds that had shorted the stock—borrowing shares with the aim of profiting by selling them and rebuying them at a lower price later—were left in a squeeze when they had to rebuy the stock at a higher price, which sent the price even higher.

  • Professionals are "reeling." The Wall Street Journal says professional investors are "reeling from their losses" as power shifts from them to day traders and newbie investors who use sites like Discord and Reddit to discuss which stock to pile into next—and to mock short sellers for their massive losses. On Wednesday alone, investors who took short positions in GameStop lost an estimated $14.3 billion.
  • White House is monitoring the situation. White House press secretary Jen Psaki said Wednesday that the White House and Federal Reserve are monitoring the situation with GameStop and other companies that have seen meteoric share price rises, reports Reuters. Fed chief Jerome Powell rejected suggestions that policies including ultra-low interest rates were the cause of asset bubbles.
  • Forum goes private. The r/wallstreetbets forum on Reddit was taken private late Wednesday and reappeared with a note from moderators saying that with a flood of new users, it was becoming impossible to enforce content policies, the Verge reports. "We have grown to the kind of size we only dreamed of in the time it takes to get a bad nights sleep," they wrote.
  • AMC is also heating up. The nightmare for short-sellers is continuing with steep rises in the shares of struggling companies including AMC Entertainment and BlackBerry. The Wall Street Journal reports that the flurry of activity was so intense Wednesday that AMC Networks, which has no connection to the other AMC, also spiked more than 20%
  • AOC speaks out. "Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino," Rep. Alexandria Ocasio-Cortez tweeted Wednesday. Sen. Elizabeth Warren also weighed in, tweeting: "With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn't reflect our actual economy."
  • Where will it end? The New York Times notes that despite the hype, GameStop the company "isn't noticeably different from a month ago," which makes its share price appear "wildly inflated" and a risky bet indeed. The "weird little bubble" could cause the price of more solid stocks to drop if big investors have to offload them to cover their losses, according to the Times.
(More GameStop stories.)

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