Melvin Capital, the hedge fund at the center of the GameStop stock frenzy, lost roughly 53% in January on GameStop and several other bets, according to The Wall Street Journal (WSJ).
The losses were the aftermath of a move by several retail traders who drove up shares the hedge fund bet against in a short squeeze that surprised many on Wall Street.
Melvin started 2021 with approximately $12.5 billion and now has more than $8 billion, WSJ reported. Melvin’s current figures include the $2.75 billion in emergency funds Citadel LLC, its partners and billionaire investor Steven Cohen’s Point72 Asset Management pumped into the hedge fund last Monday to help Melvin close out their position with an enormous loss. (RELATED: The Numbers Are In, And So Far Wall Street’s Hedges Took An Absolute Bath Thanks To Reddit)
It started with a SMART discovery, Melvin Capital (hedge fund) broke the cardinal rule of short selling. They took on way too big of a short position given the size of their fund, how heavily shorted the stock already was and the amount of shares outstanding.
— Stephanie Ruhle (@SRuhle) January 30, 2021
The cash infusion constituted part of a deal where Point72 and Citadel get non-controlling revenue shares in Melvin for three years, according to the WSJ.
Melvin has embarked on a de-risking its portfolio, the WSJ reported. Its leverage ratio—the value of its assets compared with its capital from investors—is reportedly the lowest since Melvin’s 2014 founding, while the fund’s position-level liquidity—its ability to easily exit securities in its portfolio—had increased significantly, according to the newspaper.
Melvin Capital, and high-profile hedge funds Citron Research and Point72, suffered heavy losses this month after GameStop shares skyrocketed, Business Insider reported.
Several amateur investors, interacting with each other on Reddit, Discord and other social media networks, attempted to burn GameStop short-sellers by purchasing shares and shooting the stock price up to 2000% month-to-date, in a mania that generated dozens of memes. (RELATED: ‘I’m Out! Please Cut Me Off’: Fox News Segment Devolves Into Shouting Match Over GameStop)
A GameStop sea shanty. The Internet remains undefeated. pic.twitter.com/ydl0PTT46c
— Josh Constine – SignalFire (@JoshConstine) January 28, 2021
Short sellers lost about $19 billion on GameStop this year, according to Business Insider.
The trading activity that gave rise to GameStop’s prices has extended to other popular targets of short-sellers, including Bed Bath & Beyond and AMC Entertainment, CNBC reported.
The GameStop episode will likely change how the industry functions, some fund managers told WSJ, with fewer hedge funds being likely to highlight bearish positions in the future by disclosing put options.
Hedge funds are likely to use Securities and Exchange Commission rules to keep their positions confidential, building them up quietly like activist-investors who have been using such rules. More funds also may institute rules about avoiding thinly traded, heavily shorted stocks, the managers told WSJ.