How Much Have Hedge Funds Lost

Unless yous live under a rock, you probably heard about the GameStop Short Squeeze that began January 2021. Though the GameStop story is most likely over, the theme of retail investors taking on Wall Street giants is akin to David taking on Goliath.

eight Hedge Funds that Lost Coin Betting Confronting GameStop

1. Melvin Capital letter
2. Light Street Capital
3. White Square Capital
4. Point72 Asset Management
5. Citron Capital
6. D1 Capital Partners
7. Maplelane Capital
8. Candlestick Capital Management

Although “GameStop hedge fund” is a popular Google search with—at the fourth dimension of this article—more than than 4,000 inquiries per month, there are no Wall Street hedge funds dedicated solely to GameStop stock. To clarify, the GameStop rally was a story that saw large hedge funds pitted against small retail investors—that is, everyday people who purchase and sell stocks using trading platforms.

Reddit investors really took the spotlight in this story, as Reddit traders—that is, amateur traders active on Reddit message boards—were responsible for the market manipulation that created the GameStop frenzy. The stock rally caused many individual investors to realize that true market place manipulation occurs backside the scenes, mostly to the advantage of institutional investors (banks, hedge funds, and nugget management companies).

GameStop, Hedge Funds, and Short Selling: A Quick Overview

GameStop is a brick-and-mortar retailer that sells video games. The business model seems outdated to nigh analysts because video games can be purchased and played with streaming services, making much of the hardware obsolete. GameStop was seemingly dying a irksome death, and its stock price reflected as much.

But some vocal internet pundits had other ideas, pointing to the optimistic assessment of Chewy CEO Ryan Cohen and hedge fund manager Michael Burry, who made investments in the video game company—purchasing equally much as 13 per centum and 3.3 percent of the company, respectively. Retail investors, especially those vocal on Reddit, began maxim the GameStop stock was undervalued.

Their bullish outlook pushed the stock price upward and attracted attention from institutional investors. But these institutional investors had a dissimilar idea. After performing primal analysis, they decided that GameStop was yet expressionless meat, and started curt selling shares of GameStop stock.

Hedge Fund Investment Strategies

A hedge fund is a visitor that manages assets contributed by accredited investors—that is, investors who have an income source of $200,000 more annually, and/or have more than 7 figures in personal net worth, excluding their personal residence. These hedge funds are not like a common fund where smaller investors (such as employed individuals contributing a portion of their paycheck) place their equity into a diversified pool of stocks and bonds. Rather, hedge funds can invest notwithstanding they want, leveraging strategies beyond the simple buying and selling stocks or buying and property to collect dividends.

Some of these strategies involve using derivatives. Derivatives are not stocks and bonds, but rather contracts with a value that relates to the value of the underlying security they are tied to. One more recognizable types of derivatives is the option contract, where an investor can purchase the right (but non obligation) to purchase or sell a given stock (similar GME stock) at an agreed upon strike price.

The Short Sell to the Short Clasp

Another similar type of strategy leveraged past hedge funds is to position themselves as a short seller. A brusk seller borrows stocks and and then sells them at market price. When the price goes downward, they repurchase the stock (at a lower price than that which they sold information technology), and return it to the original owner. This is the type of stock market motility that, when replicated with hundreds of thousands of GameStop shares, tin produce a huge windfall of cash. Since this strategy involves more complexity than what is available to apprentice investors, information technology’s actually only used by institutional investors, like hedge funds.

If the stock cost does not autumn, the short seller is in trouble. As the cost rises, they will be in the red considering they volition need to repurchase the securities at a much higher price than what they sold them for. And when this strategy is replicated with thousands or hundreds of thousands of shares, this can result in big losses.

The members of the reddit forum r/WallStreetBets had a different thought. Seeing that hedge funds were short selling GME, they hatched a plan to drive up the price. They held their shares and talked upwards a bullish perspective online, encouraging more than people to buy GameStop stock. The stock cost soared to $347.51 per share by the end of January, a whopping 1.743 percent increment from its price only a few weeks earlier.

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In response to these events, trading app Robinhood shut down the power to buy shares of GameStop, triggering the ire of retail investors everywhere. It seemed that Robinhood, by cutting off the ability of everyday people to go along the curt squeeze, was unfairly favoring the big banks over the little human being. Robinhood was even called in to testify before Congress, where CEO Vlad Tenev defended his choice and explained that the events effectually GameStop had a 1 in 3.v one thousand thousand gamble of occurring.

Fifty-fifty still, the hedge funds that had initially bet on GameStop’southward failure were now in a curt squeeze, forced to sell their shares of skyrocketing GME stock to mitigate the loss.

8 Hedge Funds that Lost Money Betting Against GameStop

It can be difficult to pin downwards the exact losses for some of these hedge funds because they have no legal obligation to release their financial information to the public. And then, while we may never know the exact corporeality of money lost during the GameStop Curt Clasp of 2021, we practise have a general idea of which hedge funds were affected, including:

1. Melvin Capital

During the offset three months of 2021, Melvin Capital lost 49 percent of its investments. Prior to that, between 2014 and 2020, they had seen annual returns of xxx per centum. In response to this hemorrhaging, Citadel and Point72 provided a $three billion bailout.

2. Calorie-free Street Upper-case letter

Light Street Majuscule, a San Francisco Bay Area based house with $iii.3 billion in assets under its management, deflated 20 percent in 2021.

3. White Square Uppercase

This London based hedge fund was and then hard hit by the GameStop curt squeeze, they were forced to shut their doors and returned capital to inventors, saying information technology was time to review and reflect on their business concern model.

iv. Point72 Asset Direction

Based in Samford, Connecticut, Point72 had $19 billion in assets and lost 15 percent in 2021.

5. Citron Majuscule

Citron’s managing partner, Andrew Left, said that Citron suffered 100 percent losses on its GameStop positions during the retailer’southward bullish rally.

half dozen. D1 Uppercase Partners

With $20 billion in its care, D1 Upper-case letter Partners suffered 20 percent losses over the course of 2021, according to an within source that briefed Bloomberg.

seven. Maplelane Uppercase

Maplelane Capital’s strategy did not revolve around brusk selling, just around the like practice ofoptions trading. To continue it short, an choice is a type of contract that gives the owner the right, just not obligation to buy a stock at a sure price. A put option is used when an investor thinks a stock price will fall, assuasive them to sell information technology at an agreed-upon strike price despite its market value. Ordinarily options are a practiced way to minimize risk when acting on bearish perspectives, but even and then, Maplelane was heavily affected by the short clasp, losing 33 percent of its $iii.five billion.

eight. Candlestick Capital letter Management

This Greenwich, Connecticut investment house saw percent losses in the teens, according to several sources. The previous year they had posted a 26 percent return.

Are Hedge Funds Yet Losing Money?

The GameStop brusk clasp cost hedge funds $nineteen.75 billion in January lone. About of these hedge funds are still experiencing fallout in one form or another. While some have slowly worked their mode back to normative returns, others are downwardly and out for good—at to the lowest degree until they notice fresh and willing sources of capital.

The GameStop Short Squeeze amazed the stock market as net pundits usedWallstreetbets Slang to pump up GME and send its cost “to the moon.” Experts are wondering if the same thing could happen once more, and many investors are still bullish on GameStop. Ane optimistic and vocal trader asserted that the share toll will break $300 over again, though it remains to be seen if institutional investors are interested in participating or how thebest trading apps will respond to investor demand.

Reddit Gamed the Stock Market with GME; Forever Irresolute Public Opinion of Wall Street

The GameStop Short Clasp is a great parable for illustrating how the stock market does non always reflect reality. Though Reddit investors were able to band together to “stick it” to institutional hedge funds this time, many people felt that the event proved the market was stacked against retail investors.

For others, though, it demonstrated the importance of investing. And while information technology’southward unlikely you’ll strike it rich quick with some other short squeeze stock market issue, youcan build long-term wealth with careful planning, strategizing, and networking—all things included in anInfinity Investing membership. Sign upwardly today to showtime your journeying to financial liberty!