Hedge Fund That Bet Against GameStop Lost More Than 50% In January
Melvin Capital, one of the hedge funds targeted by Redditors in the recent GameStop saga, lost more than 50% on its stock portfolio value in the month of January.
The investment firm sustained most of the heavy losses as a result of the ‘short squeeze’ triggered by amateur investors who raised the value of GameStop and other stocks Melvin Capital had bet against. As GameStop’s value gained more than 400% last week, the fund saw its own assets drop by 53%, per the The Wall Street Journal.
Melvin Capital received almost $3 billion in emergency funds from two other hedge funds – Citadel and Point72 – after it was forced to sell its GameStop stocks for a heavy loss on Tuesday, putting the current value of assets held by the fund at $8 billion, down from $12.5 billion at the start of the month. Citadel and Point72 also took on losses, dropping 3% and 10% respectively.
GameStop, meanwhile, closed out the month with its value sitting at $325, having been priced at less than $10 less than 3 months ago. Although many experts predict the stock is set to come crashing down to Earth in the near future, its value has been holding steady as day traders rallied to prevent a mass sell-off, after trading platforms like Robinhood put controversial restrictions in place to stop further purchases of GME and other meme stocks in the wake of Melvin Capital’s losses.
Some of these restrictions have been lifted over the weekend, although Robinhood is currently still preventing traders on the app from buying GameStop in the face of apparently being threatened with a class action lawsuit from its users.
The rapid rise of GameStop and other so-called ‘meme-stocks’ including Nokia and AMC Entertainment – explained here – was largely organised on the subreddit r/WallStreetBets, which, despite being made private last week, has seen its membership triple to roughly 7 million. The whole saga has led to renewed calls for better oversight of Wall Street trading, with Senator Elizabeth Warren last week saying that in order to prevent market manipulation the finance industry needed to have ‘a cop on the beat’.
In spite of the fact that it lost several billion over the course of a month, CNBC reports that the hedge fund’s liquidity is strong, while its use of leverage – borrowed money – is at its lowest level since 2014. All of which means that despite the best efforts of r/WallStreetBets, Melvin Capital looks set to live to fight another day.
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Wall Street Journal