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It may be the wolf which eats Wall Street, and the London Stock Exchange for afters, as battalions of small investors get together through social media to bet for, or against, hedge funds and traditional corporate investors.
The instructive model is what has happened to the massive $13 billion US hedge fund Melvin Capital, which bet on the video-games company GameStop failing, by short-selling its shares. Meaning it stood to gain if the price went down and lose if it went up.
It seemed the perfect piranha plan until thousands of members of a Reddit subgroup, WallStreetBets, decided to pile in to support GameStop and inflict crippling losses on Melvin and other funds.
By Tuesday evening last week, Melvin had given up, kept afloat only by a $3bn injection by two of its backers. Other hedge funds lost at least $2bn as GameStop’s price turbocharged.
It was a conspiracy by the little guy, and in the case of the Reddit group, the kids, two million of them following it.
At the beginning of this year GameStop shares were selling at $7 – a year ago at $4. By Thursday they had spiked to $480 as word got out and more amateurs joined the maul, before dropping back at one point by 60 per cent in the day, presumably when the WallStreetBets punters took their profits.
It all began when a serial investor, Ryan Cohen, who had previously bought safe stocks like Apple, bought nine million shares in GameStop last year at an average price of $8.43, an outlay of $76 million.
He saw the opportunity, but he genuinely wanted the company to succeed by becoming a specialised e-commerce retailer of games, rather than a bricks-and-mortar shop presence.
His arrival initially had only a small push on shares, going up to $13. He probably didn’t intend it, but he was also betting against the rapacious hedge funds.
At the opening of Wall Street and the Nasdaq on Thursday, after the WSB latecomers jumped in their thousands, Cohen’s $76m stock was worth more than $3bn.
For his investment Cohen got three seats on the board, but as the stock began to take off short-sellers had to buy more of it to cover their borrowings – it’s known as the “short squeeze” – as the investors who had bet against it tried to cover their losses. And, of course, the price inevitably went up.
The great game
The hedge funds game is to borrow shares in a company from other investors, put them on the market, wait until the price falls, buy them back, return the borrowed shares and pocket the profit. It’s financial sleight of hand, jiggery-pokery.
To them, GameStop seemed fair game. It had heavy losses last year and was the most shorted stock on Wall Street, with around 30% of its shares in the portfolios of hedge funds.
But rather than the ailing patient having to go to the ICU and reap huge profits for the professional investor, there was resuscitation through what seems to have been personal animus against them by the Reddit amateurs. Almost a generational fight, robbing the rich to give to the millennial poor.
When the stock rose to $41, Andrew Left, founder of Clinton Research, bet that it would halve. Oh no, said the WSB brigade, in what was clearly a reaction against the old guard – and him – and bought more, pushing the share value up 50% overnight. Since the beginning of January, Gamestop is up more than 1,700%.
One WSB investor claims he turned a $55,000 punt into $11.2m within just a few hours. Everyone, it seemed, was a winner – except the hedge funds, of course.
Rumblings began. One online platform called Discord removed the WSB server for alleged hate speech, the majority of it against the hedge fund pinstripes.
In response, the Redditers said: “You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad.
“That room was golden and the people that run it are awesome. We blocked all bad words with a bot, which should be enough, but apparently if someone can say a bad word with weird unicode icelandic characters and someone can screenshot it you don’t get to hang out with your friends anymore.”
The price took another hike on Tuesday when Elon Musk, whose company Tesla has suffered from
short-selling in the past, tweeted “Gamestonk” and linked it to WSB. By midweek the loss-making retailer was valued at more than $20bn, although market logic dictates that this will fall – demonstrated in Thursday’s volatility – and many amateur investors will lose heavily. But then logic hasn’t had much input in this affair.
Hedge fund manager Michael Burry, of Scion Asset Management – played in the Hollywood movie The Big Short by Christian Bale – and who had previously shorted Tesla, warned that GameStop’s share price was out of control, tweeting that it was “unnatural, insane and dangerous”.
It may have been all of those thing but Scion reportedly made a 15-fold return on his fund’s investment in the company.
The amateurs are now targeting other companies that have been shorted by hedge funds. US stocks AMC Entertainment, Koss Corp and BlackBerry all saw their share prices rise on Wednesday, only to fall back overnight.
UK shares in Pearson and Cineworld rose on speculation they could be next in line for the WSB treatment, only to fall in early trading on Thursday.
The Sydney Morning also reported that a tiny West Australian mining company saw a 50% surge in its share price, probably because its stock market code matches that of GameStop.
Biden his time
The GameStop bubble has also caught the attention of the new Joe Biden administration in the White House.
Press Secretary Jen Psaki said Biden’s economic team, including newly-appointed Treasury Secretary Janet Yellen, was “monitoring the situation”.
US stock exchange Nasdaq’s chief executive Adena Friedman joined in, saying exchanges and regulators should watch whether anonymous social media posts could be driving “pump and dump” schemes.
They don’t like the upstarts.
In the past, if you had the cash and the cachet, you hired a broker to advise you what shares to buy, with the broker taking a commission on the trade.
The rise of cut-price and free apps and forums like WSB means that anyone, with only a little cash, can take a punt on the market.
It’s the digital rebels against the analogue old guard.
As one of the WSB moderators put it: “What I think is happening is that you guys are making such an impact that these fat cats are worried that they have to get up and put in work to earn a living.”
It’s a bubble, of course, like the South Sea one, as the wild fluctuation in the share price of GameStop on Thursday showed.
Get in early, help to inflate the bubble and, if you time it right, come out with a fortune – hang in too long and you lose it all.
And like all bubbles it will burst. Or will it? The hedge funds are hoping so. But there are sure to be other WSBs and GameStops and millions more small-time investors clubbing together.
If it isn’t democratising capitalism it’s certainly voting for a different model.