Betting against the crowd isn’t always smart.
Hedge fund Melvin Capital reportedly lost $4.5 billion in assets value in January – a 53 percent drop – after its massive bet that GameStop’s stock price will fall turned sour, the Financial Times reported Sunday. And that’s after a $2.75 billion cash infusion from previous investors, who jumped in to save the fund from collapse.
For an explainer of what happened, go here, but the short version is that Melvin, as well as some other funds, bet against GameStop by shorting massive amounts of its stock (shorting means selling the stock in the hope you’ll be able to rebuy cheaper later). Reddit traders that frequent the subreddit r/wallstreetbets noticed that GameStop’s stock was ridiculously (perhaps unfairly) over-shorted, and they responded by buying the stock en masse, driving the price up higher, forcing shorters to buy the stock to cover their losses (this is know as a short squeeze). This, in turn, put enormous pressure on Melvin and other shorters; eventually, Melvin said it exited its short position on GameStop, likely at a massive loss.
According to FT, Melvin has since repositioned its portfolio to be a lot less risky; a source told the outlet that the company’s leverage ratio is at the lowest it has been since the firm was founded in 2014.
Prior to the GameStop fiasco, Melvin was one of the best-performing hedge funds out there, with a 52 percent yearly gain.
GameStop’s stock price is still sharply up compared to just weeks ago and is currently trading at about $344 in premarket trading.
Traders at r/wallstreetbets have since turned their attention to other assets. One of them is silver, the price of which has surged to $29, a price the precious metal hasn’t seen in eight years.
With #silversqueeze trending on Twitter, millions of small-timers seem ready to put their money (and, perhaps, gains from the GME trade) into silver, armed with the notion that banks have been suppressing the price of silver and pumping it is a way to hurt them. One thing is certain — funds and large investors, no matter how big, will now think twice before betting against them.