In very simple terms, what is a hedge fund?
Here is an example:
Stock XYZ (fictional stock) is at $10/share. You expect it to go down to $5/share. So what do you do? You borrow some shares, let’s say, 10, from a friend and you sell them immediately at $10/share. Now you have $100 in your pocket! But now you owe your friend 10 shares. So you wait until the stock hits $5/share and then you buy back 10 shares.
Now you can give back your friend the 10 shares you owed him, and you keep $50 in your pocket!
In a nutshell, Hedge Funds are Alternative Investment used to take advantage of certain market opportunities to diversify portfolio-risk.
What/Who is Gamestop Corp (GME)?
Gamestop Corp (GME) is a video game company who after being hit by the wrath of Covid-19, recorded heavy losses and revenue fall. Before the Covid-19 outbreak, Amazon had been (and countinues to be) giving the retailers a hard time to survive. The pandemic did them no good.
Naturally, big international investors thought Gamestop was going to go bust and therefore shorted GME.
So, what happened to the stock?
The institutions (Hedge Funds) that were shorting GME bought more short positions trying supress the stock price. In total 71 million short positions were taken even though Gamestop only had a float of 69.75 million shares (you can have more short positions than actual shares).
Alright, so what happened on Reddit?
There were roughly between 20 to 30 million actively traded GME stocks and 71 million short positions who all need to buy stock. That, clearly, is a lot of demand and not much supply.
r/wallstreetbets (a sub-reddit where Retail Investors discuss about stocks on social media) noticed this and speculated that if they bought the stock and held their position, they could result in the price to go up and trigger a short squeeze. So they all, simply, bought shares.
Because they bought shares, the price went up, and the Hedge Fund certainly did not expect this. They (Hedge Funds) essentially sold shares at $20/each, expecting to buy them back for their lenders at $5/each or even less to make some profit – but now the shares are at over $300/each!
Let’s do some simple math.
If, Hedge Fund sold 10 shares at $20, they gained $200. But now they have to buy them back at $300 each, which would cost them $3000. Given that they are Hedge Fund (Big Money People), they don’t transact in mere 50s or 100 shares. They play BIG! They buy thousands or even millions.
The Hedge Fund has to give back the shares within a certain time frame. They can’t sit around and wait for ‘favorable’ time.
That is what happened. If you own GME shares, then this is your year!
Trading in the stock was halted nine times on Monday as shares reached a record $159.18, more than double its previous high.
How did r/wallstreetbets notice this?
You need to familiarize yourself with these 4 names –
- Robinhood – A Free brokerage in US
- Melvin Capital
Point72 is a hedge fund run by Steve Cohen, who owned SAC capital, where Gabe Plotkin of Melvin Capital used to work earlier.
Citadel is run by Ken Griffin, and is a very big market maker and hedge fund in the US markets.
Citadel and Point72 Asset Management extended a $2.75 billion financial lifeline to the Melvin Capital. Citadel pays Robinhood for “order flow” – the ability to see trades from users before they hit the exchange.
Well, it seems like most of the r/wallstreetbets redditors are on Robinhood. Reddit users were able to identify stocks that Melvin was wagering against and that, I believe, was the starting point of all.
Now, naturally, Melvin Capital (the hedge fund) is hurting.
GameStop soared 602% in the month through Thrusday. What I find funny is how this short squeeze was started by retailers on reddit (REDDIT!??) and not investment bankers!!
Is it a reality or just an online enthusiasm?
Are people (retail investors) really aware of what they are doing or has it come down to a mere blind chase? When Elon Musk tweeted about SIGNAL, another company which was not intended by Musk surged it’s share price.
Few Tweets worth cheking!
It’s fun to read about home traders making bank. 20 yrs ago, I was one of you. Today I’m here to tell you: *Don’t trade with money you don’t own.*— Chris Sacca 🇺🇸 (@sacca) January 28, 2021
I know because I did that. I kited my student loans, YOLO’d them to $12m, and then, in an f’ing blink, I woke up $4m in debt.
It’s 2020.— Garrett Scott 🕳 (@thegarrettscott) January 27, 2021
GameStop is the hottest stock on the market.
My friends and I ride electric scooters to work.
Pokémon cards are worth hundreds of thousands of dollars.
The richest man in the world builds rockets.
This is exactly the future 10 year old me wanted to live in.