Tuesday, May 11, 2021

Hedge fund Melvin closes bet against GameStop after attack on Reddit traders

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Melvin Capital quit his bet against GameStop, having lost billions of dollars after a battle with amateur traders that drove up the share price of the game retailer and other companies he had bet against.

The hedge fund’s exit from the heavily traded stock, after suffering large losses, marks a triumph for retail traders coordinating on Reddit message boards.

The New York cabinet, founded by Gabe Plotkin, a protégé of Point72 founder Steve Cohen, was forced earlier this week to seek a $ 2.75 billion cash injection of its biggest rivals Citadel and Point72, after losing about $ 3.75 billion, or 30%, 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,” the company said. “We liquidated our position in [GameStop]. “

Shares of GameStop have risen more than 1,500% this year to around $ 330 in the morning in New York on Wednesday, with stock and option trading volumes skyrocketing over the past week. retail traders piled up.

The gains pushed the company’s valuation above $ 20 billion, eclipsing a record on the precipice of the financial crisis.

Users of the popular Reddit r / wallstreetbets discussion board have bought shares of the retailer as well as a large number of call options, which pay off if GameStop shares go up. The r / wallstreetbets page for the past few days has been filled with screenshots of investment accounts showing multi-million dollar winnings, with users pushing each other to keep buying the stock.

Another high-profile short seller, Carson Block, told the Financial Times on Wednesday that his hedge fund Muddy Waters had “significantly reduced” its short positions “in all areas.”

“It’s not rocket science – cut your shorts massively or risk going bankrupt,” Mr. Block said. “This phase will pass, but until then it is better to be a spectator than a participant.”

Muddy Waters has previously disclosed bets against US-listed Chinese education firm GSX Techedu, another of Melvin’s big shorts that has more than doubled in value this year.

Reddit traders also targeted a small company called Citron Research, run by short seller Andrew Left. Mr Left last week said he was starting a short bet on GameStop, but was quickly forced to backtrack as the title soared. On Wednesday, he said he closed his short position in the company, buying shares of GameStop “in the 90s” and taking a complete loss on the trade.

Line graph of the value of GameStop shares traded each day (in billions of dollars) showing that trading activity in GameStop has skyrocketed

Melvin is one of the most respected companies in the industry, managing approximately $ 12.5 billion in assets. Last year, it gained 52 percent, ranking it among the top performing long-short funds.

The company has taken hard-hitting bets on declining corporate stock prices and holds two of the five largest individual short positions in Europe, measured as a percentage of a company’s share capital, according to data group Breakout Point.

Some of Melvin’s short positions were placed via put options – which offer the right to sell at a certain price – and are disclosed in quarterly regulatory documents with the Securities and Exchange Commission, allowing retail traders to see how the company is positioned.

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