Melvin Capital Management bet against GameStop Corp. since 2014 and still believes online video game downloads will surpass the retailer’s business model, the hedge fund’s founder said in an early copy of his congressional testimony made public on Wednesday.
Gabe Plotkin’s Melvin Capital lost more than 50 percent of its investment in January as losses accrued from its short bets against GameStop and other companies. GameStop was promoted on the Reddit WallStreetBets forum and other social media platforms, with rising stock prices affecting the profitability of several well-known companies, including Steven A. Cohen’s Point72 Asset Management and Daniel Sundheim’s D1 Capital Partners.
The GameStop action was fueled in part by an army of rising individual traders urging each other on platforms like Reddit to buy stocks and options and raise Melvin, a special poster target. The seemingly relentless march of GameStop upwards also created what traders described as a kind of contagion effect. Managers have lost confidence in their short positions and hedged those bets, while lowering their stakes to other companies to reduce portfolio risk.
GameStop’s seemingly relentless march upwards also created what traders described as a kind of contagion effect, with managers losing confidence in their short positions and covering those bets. These managers have lowered their stakes to other companies to reduce risk in their portfolios.
The episode raised questions about market integrity and triggered federal polls into possible market manipulation. Prosecutors sent information from brokers such as Robinhood Markets Inc., the popular online brokerage that many individual investors used to trade GameStop and other stocks.