As the epic battle of WallStreetBets vs hedge funds continues to rage, neither side plans on giving up. Companies on the crosshairs of short-sellers are wisely staying quiet as their stock prices fluctuate wildly in a virtual tug-of-war. But, who is actually winning?
How It Started
The WallStreetBets vs hedge funds skirmish started innocuously enough. It started with a relatively troubled company GameStop, which is having problems surviving the pandemic. The video game retailer saw its fortunes dwindle as it closed one shop after another. The floundering retailer caught the attention of hedge fund firms, including the $12.5 billion rich Melvin Capital. Hedge funds tend to circle on dying companies, betting that the stock will go lower. If GameStop shares fall, they will earn a tidy profit. Mid-January, with GameStop share prices hovering between $30-$40, Citron Research gave GameStop its death knell, predicting that the stock price, currently at $40, will fall to $20. It’s a signal to start the feeding frenzy.
However, retail investors holding GameStop shares had other ideas. They believed that hedge funds jumped the gun too soon on GameStop. The addition of ex-Chewy CEO Ryan Cohen to the board in November signified the company’s willingness to turn around. Retail investors said hedge funds didn’t consider the revenue potential of new consoles that just hit the market. Plus, Wall Street seemed to ignore the fact that online sales grew 300%. Instead of dumping shares, the retail investors banded together and held firm. They all rallied under the Reddit forum WallStreetBets, who encouraged investors to hold on while the stocks rocket upwards.
From Short Selling to Short Squeeze
Instead of floating belly up, GameStop started rising up. Way up. Five days after Citron’s recommendation, stock prices zoomed from $43.03 to $147.98., Hedge firms started panicking. The stocks they borrowed at the $40 range are now trading three to four times, and they’ll need to pay up soon. Since January 11, stocks gained upwards of 1,200%.
Hedge funds began closing their bearish bets. According to Reuters, firms lost around $7 billion in short squeezes. Chief among them is the original hedge firm, Citron Research, which closed their position at $90, incurring a 100% loss. Meanwhile, Melvin Capital had to take additional funding worth $3 billion to cover its spread. “The stock trading mob ran out of runway with Tesla's stock and now they have turned their attention to other stocks, like GameStop,” noted David Trainer, CEO of New Constructs. He said that given the fickleness of the mob, they can also drop GameStop at any point.
Revenge of the Hedge Funds
As the trading frenzy continued, GameStop had to suspend trading a number of times during the week. Popular retail trading app Robinhood decided to suspend GameStop trading along with other highly volatile stocks. By Thursday, GameStop shares fell and erased nearly $11 billion in market value after brokerages choked off demand for the stock. They did so by curbing trading on the apps used by WallStreetBets members.
WallStreetBets protested furiously against the move. Robinhood itself got hit with a number of lawsuits. Lawmakers, who were content watching from the sidelines until then, began taking up the cudgels for retail investors. Democratic Senator Sherrod Brown, the incoming Senate Banking Chairman, said he plans to hold a hearing on the “current state of the stock market.” Representative Alexandria Ocasio-Cortez (D-NY) termed it “unacceptable” that Robinhood decided to suspend trading. Surprisingly Texas Senator Ted Cruz reposted Ocasio-Cortez’s tweet, prefacing it with a “Fully agree” message.
What Happens Next?
Late Thursday, Robinhood reinstated trading for GameStop, after which stocks again spiked 61%. In the long run, GameStop will eventually settle on a share price that reflects more of its market value and less on investor sentiment. “This will burn itself out, like any other mania, but there will likely be some impact on the market as a whole,” noted Marshall Front, chief investment officer at Front Barnett Associates.
Watch the report from the Verge detailing how Reddit gamed the stock of GameStop:
Who do you think will eventually emerge as the winner in the WallStreetBets vs hedge funds battle? Are you willing to put your money betting for the outcome? Let us know what you think about GameStop and other short sell targets. Share your opinions below in the comments section.