Bloodbath: Hedge Fund Short Sale Losses Top $1 Billion Following GameStop Stock Surge
United States short-sellers are out more than $70 billion on their short positions this year, according to Reuters, and at least $1 billion of that is the result of a Reddit-driven GameStop stock surge that, last week, saw shares of the video game retailer, a heavily shorted stock, skyrocket in price.
“The hefty losses come as shares of highly-shorted GameStop jumped more than 1,000% in the past week without a clear business reason, forcing short-sellers to buy back into the stock to cover potential losses — defined as a short-squeeze — while retail investors then piled in to benefit from the surge,” Reuters said.
“Chasing shorted companies became a trend among retail traders, rippling across U.S. markets and Europe. Ortex data showed that as of Wednesday, there were loss-making short positions on more than 5,000 U.S. firms,” the outlet continued.
Those numbers are based entirely on trades made just in January and, while they cover losses from short sales across the board, around $1 billion of that is the fallout from the GameStop stock surge by itself. Short sellers lost an additional $600 million on Bed Bath & Beyond, another stock targeted for purchase by r/WallStreetBets, a Reddit-based community that banded together to squeeze short-sellers targeting a handful of failing businesses.
Other targeted stocks include BlackBerry, theater chain AMC, clothing retailer Express, and cell phone company Nokia.
According to Business Insider, hedge funds are feeling the pressure. And per The Wall Street Journal, Melvin Capital, “the hedge fund that has borne the brunt of losses from the soaring stock prices of heavily shorted stocks recently, lost 53% in January, according to people familiar with the firm.”
Melvin had to ask fellow hedge funds for a bailout.
“Melvin was founded by Gabe Plotkin, a former star portfolio manager for hedge-fund titan Steven A. Cohen. It started the year with about $12.5 billion and now runs more than $8 billion. The current figure includes $2.75 billion in emergency funds Citadel LLC, its partners and Mr. Cohen’s Point72 Asset Management injected into the hedge fund last Monday,” the WSJ noted. “As part of the deal, they got noncontrolling revenue shares in Melvin for three years. So far, Citadel, its partners, and Point72 have lost money on the deal, though the precise scope of the loss was unclear Sunday.”
GameStop shares are not expected to stay high forever. By the end of trading on Friday, the stock was already down from its peak, but still hovering around $325 per share, far more than the $10 it was trading for back in September.
The r/WallStreetBets incident, though, has triggered concern from both Wall Street and federal regulators, who seem intent on shutting down retail investing, like that done through free stock trading apps like Robinhood. By Wednesday, Robinhood had already installed new restrictions on trading shares of GameStop and other targeted companies. Federal legislators are, it seems, also looking at Wall Street’s actions, threatening to ask whether hedge funds and their powerful friends collaborated with allies in the so-called “Big Tech” industry to put a halt to “amateur” trading operations when stock share prices skyrocketed.
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Author: Emily Zanotti