This deleveraging process (on the long and short side) could drive additional volatility in the weeks ahead. If that’s the case, long-short hedge funds would need to continue to unwind their short sales and would finance the trades by deleveraging their long holdings. That said, there are plenty of other “GameStops” (small companies with high short interests) out there, so we could easily see additional short squeeze dynamics play out. ![]() I expect this noise to work itself out in the short-term as short positions are covered and the retail excitement subsides. Once those restrictions were lifted, GameStop rallied again and the broader market pulled back. GameStop shares fell and the broader market rallied, but there was also outcry from retail investors who felt they were being unfairly restricted, not because they were doing anything wrong, but because the hedge funds were losing the game. As a result, there was some market relief. It was rumored that they were pressured to do so by big hedge funds that actually drive significant revenue for them. On Thursday, January 28, several retail brokers (Robinhood, TD Ameritrade, etc.) restricted additional purchases of GameStop and other targeted companies. I suspect we have recently seen evidence of that in the market in the form of broader downward pressure and increased volatility. First of all, hedge funds have been hurt so badly that in many cases they have been forced to sell higher quality investments to buy the shares necessary to cover their short positions. The same narrative has played out for shares of other struggling companies like AMC Theatres, Nokia, Blackberry, and Koss Corporation, though not to the same extreme levels observed with GameStop.Ī few things come to mind. To be clear, the share prices we are seeing are completely divorced from any underlying fundamentals for GameStop, and are purely reflective of extreme levels of demand for the shares. Soon, every retail investor on the planet (whether they understood what was going on or not) wanted to get a piece of the action, so the buying continued. Hedge fund managers are unhappy because they have lost untold billions on what they believed to be a sure thing – enough, in some cases, to threaten their solvency. Having briefly touched $500, shares were trading at $325 at the end of January. Hedge funds were betting GameStop shares would fall from a price of $4 back in June. The only way to close out a short position in a stock is to buy the shares, so as day traders pushed the stock up, short sellers were also forced to buy shares in order to close their positions, which in turn drove the price even higher - much higher. The idea was that if enough people took action, the share price would rise, which would work against the short sellers. A public message board on Reddit encouraged people to buy shares of GameStop. If the stock were to fall, the short sellers would make money, but in the event it were to spike higher, their potential losses would be literally unlimited. In many cases, they were using derivatives (options etc.) to amplify their bets further, which resulted in more than 100% of the GameStop shares being sold short. Several large hedge funds held short positions on GameStop (they profit if the shares decline in value, so they are betting the stock will fall). The pandemic has accelerated the long-term trends that could be the eventual demise of this brick and mortar video game retailer. GameStop is a declining business, not unlike Blockbuster Video circa 10 years ago. GameStop has become the poster child for what amounts to a very interesting clash between retail day traders coordinating on internet message boards and short-selling hedge funds. ![]() So, to help explain things beyond the headlines I reached out to Nick Juhle, our Director of Research - someone we at Greenleaf Trust rely on for his ability to thoughtfully give us the real story. When my 13-year-old neighbor asked me about buying a stock he learned about from a meme on the internet, I knew we had reached that state of confusion about a financial battle playing out on Wall Street. ![]() Fast and prolific enough that it can oftentimes be confusing. And, in our information society news travels fast and from many different directions. ![]() It seems these days that there are a number of battles being waged out in the world.
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