GameStop Investors Flex Their Muscles amid Shuttered Hedge Fund

Reddit investors pack a powerful punch, just ask hedge fund managers. London-based White Square Capital is shuttering its operations after losses it suffered early in the year from popular meme stock GameStop, according to a report in the Financial Times, citing people close to the situation. White Square, which was founded by Florian Kronawitter, an alum of Paulson & Co, was reportedly short GME.

White Square was among the hedge funds to bet against GameStop just about the time that the WallStreetBets revolution was taking hold. The hedge fund got caught in the crosshairs, reportedly experiencing a double-digit percentage decline from the bet and derailing its assets under management (AUM), which at their prime were USD 440 million.

‘Long/Short Model Challenged’

Not only have retail investors succeeded in outtrading hedge fund managers, but they have managed to compromise one of the tried and true strategies — equity long/short. Kronawitter reportedly stated:

“The decision to close down is related to thinking the equity long-short model is challenged.”

The FT source suggests that meme-stock investors were not to blame for White Square’s demise. Meanwhile, White Square’s pain isn’t translating to GameStop’s gain, at least not today, with shares currently trading lower by about 1%. Year-to-date, however, the stock has rallied more than 1,100%.

Bad Timing

January 2021 was a painful month for short-sellers in GameStop stock. In the month, GME shares suddenly skyrocketed from USD 17 to almost USD 500 at the height of the mania, as retail investors on the WallStreetBets Reddit forum banded together and blindsided short-sellers.

Their strategy worked, as retail investors’ profits skyrocketed at the expense of short-selling traders. The target list of highly shorted stocks has since expanded to include movie chain AMC Entertainment, antiquated (but trying to stay relevant) mobile device maker BlackBerry and others. White Square investors will be getting their money back as the sun sets on the firm’s flagship fund.

Risk On

GameStop’s short volume ratio is currently 23%, compared to a lesser 21% for meme stock cousin AMC Entertainment. according to Fintel data. Meanwhile, the volatility in the equity markets is expected to persist for the foreseeable future.

Investors have money to burn, after depositing USD 18.5 trillion into bank accounts in Q1 2021 compared to USD 15.8 trillion in the prior-year period. And with such meager returns from savings accounts, equities — including risky meme stocks — remain a compelling option for consumers hunting returns.