Melvin Capital has exited its bet against GameStop, having lost billions of dollars after a battle with amateur traders who pushed up the share price of the game retailer and other companies it had bet against.
The hedge fund’s exit from the heavily traded stock, after it sustained significant losses, marks a triumph for retail traders co-ordinating on Reddit message boards.
The New York firm, founded by Gabe Plotkin, a protégé of Point72 founder Steve Cohen, was forced earlier this week to seek a $2.75bn cash injection from its larger rivals Citadel and Point72, after it had lost about $3.75bn, or 30 per cent, in the first three weeks of the year, according to two people familiar with the matter.
“Melvin Capital has repositioned our portfolio over the past few days,” said the firm. “We have closed out our position in [GameStop].”
Shares of GameStop have rallied 685 per cent this year to $147.98, as of Tuesday’s closing level, with stock and options trading volumes skyrocketing over the past week as retail traders have piled in. The stock was quoted as high as $365.42 in pre-market trading on Wednesday.
The gains have pushed the valuation of the company above $10bn, eclipsing a record hit on the precipice of the financial crisis.
Users on the popular Reddit message board r/wallstreetbets have bought shares of the retailer as well as large numbers of call options, which pay out if GameStop shares rise. The r/wallstreetbets page in recent days has been filled with screenshots of investment accounts posting multimillion dollar gains, with users egging each other on to continue buying up the stock.
Traders on Reddit also targeted a small outfit known as Citron Research, run by short seller Andrew Left. Mr Left last week had said he was initiating a short-bet on GameStop, but he was quickly forced to backtrack as the stock soared. On Wednesday he said that he had closed out his short position on the company, buying shares of GameStop “in the 90s” and taking a complete loss on the trade.
Melvin is one of the sector’s most respected firms, managing about $12.5bn in assets. Last year it gained 52 per cent, ranking it among the best-performing long-short funds.
The firm has taken on punchy bets that companies’ share prices will fall, and holds two out of the five biggest individual short positions in Europe, as measured by percentage of a company’s share capital, according to data group Breakout Point.
Some of Melvin’s short positions were placed through put options — which offer the right to sell at a certain price — and are disclosed in quarterly regulatory filings with the Securities and Exchange Commission, allowing retail traders to see how the firm is positioned.