Redditors Take on Hedge Funds

Jonathan Pham, News Editor

Previously poor performing stocks such as GameStop (GME) became the battleground which saw the established Wall Street hedge funds facing off against a legion of Reddit fueled meme investors. Some Miramonte student investors were able to capitalize off of this event through their custodial brokerage accounts.

“I put $3,000 into GME when it was at $150 and sold when it hit $300 which doubled my money to $6,000. From there I rolled my money into other stocks which eventually brought me to a total of $60,000” senior Sam Safahi said.

GameStop is a video game and electronics retail company. With the growth of online marketplaces such as Amazon, retailers reliant on their physical stores, such as GameStop, struggle to keep their businesses alive. Because of this, many hedge funds targeted GameStop, betting that their value would go down. Hedge funds are financial partnerships that pool funds and use a variety of strategies to earn returns for their investors.

From Jan. 20 to Jan. 27, shares of GME saw an unprecedented 838 percent gain. From then, prices were volatile as traders encouraged each other to buy more and hold their shares until the stock finally plummeted 53.9% percent  on Feb. 2. 

However, the groundwork for the GameStop rally was established way earlier. In early December, GameStop reported a 30 percent decline in sales year over year and an operating loss of $63 million in the third quarter. GameStop shares dropped 20 percent following the news of their dying business. On Jan. 11 GameStop announced the addition of three new directors, Alan Attal, Ryan Cohen, and Jim Grube. This announcement generated hype on the stock market and meme-oriented internet forum on Reddit called r/WallStreetBets with a substantial number of traders buying GME stock and causing it to spike 50 percent on Jan. 13. 

The initial surge was followed by a big spike sparked by r/WallStreetBets lashing out at financial newsletter Citron Research and Wall Street hedge funds. “GME buyers at these levels are the suckers in this poker game,” Citron Research Tweeted on Jan. 19 in response to the initial 50 percent spike. Regulars of the r/WallStreetBets forum took this Tweet and other jabs at GameStop from Chief Executive Officer Andrew Left as a direct insult to them and other gamers. Thus, r/WallStreetBets encouraged all members of their forum to invest in GameStop and spread the message across the internet.

“I joined r/WallStreetBets well before this all happened. I was a pioneer. The whole situation seemed crazy. I bought GME at $38 and went on to make a $680 profit in one day,” junior Anchul Schmidt said.

Leading up to the big spike, a number of hedge funds were actively short selling GME stock. Shorting is an investment and trading strategy that capitalizes on the decline of a given share. When short selling, an investor opens a position by borrowing shares of a stock or asset that they believe will decrease in value at a set future date. The investor then sells these borrowed shares at the present market price and hopes that the stock price will go down by the set future date so that they can buy the share at a lower price and return it to the issuer. Short sellers profit off of how much the stock price dropped within their given time frame. However, if the stock price of the shorted share rises, the investor must cover their position by buying back the share at a significantly higher price than they sold for.

In the case of GME, a short squeeze occurred due to the sheer volume of GME trades. A short squeeze happens when a stock or asset’s price jumps sharply, forcing many, if not all, of the short sellers to buy their shares at a higher price to prevent further losses. In buying the shares to cover their positions, the short sellers also add to a positive feedback loop, applying more upwards momentum to the stock they were previously shorting.

The GameStop rally caused the stock price to skyrocket, meaning that any investor or trader shorting GME lost enormous sums of money depending on how much they shorted the stock. The rally relieved hedge fund Melvin Capital of $6.75 billion. The internet was riled up. Hype behind GameStop grew as more and more traders got involved. The stock price climbed until brokerages such as Robinhood, TD Ameritrade, Charles Schwab, Webull, and ETrade halted GME trades among other volatile stocks.