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Hedge fund that attacked GameStop didn’t make it

The video left little to the imagination. Flames, explosions, dust clouds and debris. Images from the miniseries Chernobyl, about the nuclear disaster that took place in the mid-1980s near the city of the same name in Ukraine. With a rewritten subtitle the name of the enemy: Melvin Capital, the American hedge fund that according to the creator had become “too greedy” and now deserved its own ‘Chernobyl’.

When internet user Stonksflyingup opened his attack on Melvin Capital on internet forum Reddit in October 2020, he might have expected that financial meltdown would soon follow. But a year and a half later, he is still right. Melvin Capital speculated on the decline of game retailer GameStop and lost. On Wednesday night, it informed its lenders that it would cease all activities.

Until the GameStop failure, Melvin Capital Management was considered one of the most successful hedge funds in recent years. The investment firm, founded by Gabe Plotkin, at its peak managed some $13 billion (12.3 billion euros) in capital and helped clients achieve returns of up to 30 percent a year. One of Melvin’s greatest strengths was short selling: speculating on price falls instead of rises.

Fussy

Plotkin was also known for being very thoughtful. Although he ventured into daring investments, according to business newspaper, he was Financial Times he was very picky about which lenders he attracted and avoids publicity. That failed at GameStop: a report to the American stock market watchdog that Melvin had taken 3.4 million put options on the company, received a lot of attention among private investors from internet forum Reddit.

There are great risks associated with a put option. In such products, an investor in effect agrees to sell a share of a company at an agreed time for a specified price. If a share has fallen in value around the maturity date, it can sell for a profit. If the price has risen, he runs the risk that he will be left with a large loss.

Melvin Capital certainly wasn’t the only investor to go short on GameStop. The company had been in such bad shape for years that at the beginning of 2021 there were more shortsellers than ordinary shareholders. But that was not counting on a group of private investors on Reddit, who thought the negative attention surrounding the company was unjustified and believed that GameStop had much more potential than the stock price suggested.

‘thump of the century’

That disagreement simmered for a while, but suddenly erupted in January last year when Reddit investors began buying back GameStop shares on a massive scale. Their goal: to get the course “to the moon” and give shortsellers the “thump of the century”. In Melvin Capital’s case, it worked: Within a month, Plotkin’s hedge fund was down more than 50 percent.

Also read: Reddit users boost share of game store chain to hack hedge funds

Although Melvin made up for some of those losses in the past year, Plotkin sees no future in his fund. He will pay participants the remaining investment. “I gave everything I had,” he writes to his lenders in a letter, from which the FT quotes. “Recently, that wasn’t enough to deliver the returns you would expect. I now realize that it is time to say goodbye to managing external capital.”

Hedge fund that attacked GameStop didn’t make it
Source link Hedge fund that attacked GameStop didn’t make it

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