Seeing that hedge funds were short selling GME, they hatched a plan to drive up the price. The members of the reddit forum r/WallStreetBets had a different idea. And when this strategy is replicated with thousands or hundreds of thousands of shares, this can result in big losses. As the price rises, they will be in the red because they will need to repurchase the securities at a much higher price than what they sold them for. If the stock price does not fall, the short seller is in trouble. Since this strategy involves more complexity than what is available to amateur investors, it’s really only used by institutional investors, like hedge funds. This is the type of stock market move that, when replicated with hundreds of thousands of GameStop shares, can produce a huge windfall of cash. When the price goes down, they repurchase the stock (at a lower price than that which they sold it), and return it to the original owner. A short seller borrows stocks and then sells them at market price. The Short Sell to the Short SqueezeĪnother similar type of strategy leveraged by hedge funds is to position themselves as a short seller. One more recognizable types of derivatives is the option contract, where an investor can purchase the right (but not obligation) to buy or sell a given stock (like GME stock) at an agreed upon strike price. Derivatives are not stocks and bonds, but rather contracts with a value that relates to the value of the underlying security they are tied to. Some of these strategies involve using derivatives. Rather, hedge funds can invest however they want, leveraging strategies beyond the simple buying and selling stocks or buying and holding to collect dividends. These hedge funds are not like a mutual fund where smaller investors (such as employed individuals contributing a portion of their paycheck) place their equity into a diversified pool of stocks and bonds. Hedge Fund Investment StrategiesĪ hedge fund is a company that manages assets contributed by accredited investors-that is, investors who have an income source of $200,000 more annually, and/or have more than seven figures in personal net worth, excluding their personal residence. After performing fundamental analysis, they decided that GameStop was still dead meat, and started short selling shares of GameStop stock. But these institutional investors had a different idea. Their bullish outlook pushed the stock price up and attracted attention from institutional investors. Retail investors, especially those vocal on Reddit, began saying the GameStop stock was undervalued. GameStop was seemingly dying a slow death, and its stock price reflected as much.īut some vocal internet pundits had other ideas, pointing to the optimistic assessment of Chewy CEO Ryan Cohen and hedge fund manager Michael Burry, who made investments in the video game company-purchasing as much as 13 percent and 3.3 percent of the company, respectively. The business model seems outdated to most analysts because video games can be purchased and played with streaming services, making much of the hardware obsolete. GameStop is a brick-and-mortar retailer that sells video games. GameStop, Hedge Funds, and Short Selling: A Quick Overview The stock rally caused many individual investors to realize that true market manipulation occurs behind the scenes, mostly to the advantage of institutional investors (banks, hedge funds, and asset management companies). Reddit investors really took the spotlight in this story, as Reddit traders-that is, amateur traders active on Reddit message boards-were responsible for the market manipulation that created the GameStop frenzy. To clarify, the GameStop rally was a story that saw large hedge funds pitted against small retail investors-that is, everyday people who buy and sell stocks using trading platforms. 8 Hedge Funds that Lost Money Betting Against GameStopĪlthough “GameStop hedge fund” is a popular Google search with-at the time of this article-more than 4,000 inquiries per month, there are no Wall Street hedge funds dedicated solely to GameStop stock. Though the GameStop story is most likely over, the theme of retail investors taking on Wall Street giants is akin to David taking on Goliath. Unless you live under a rock, you probably heard about the GameStop Short Squeeze that began January 2021.
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