GameStop unstoppable bearish trades squeeze Hedge Funds out of $5 billion

GameStop unstoppable bearish trades squeeze Hedge Funds out of $5 billion

There’s a new wave of traders entering the stock market, and they are ready to challenge the establishment. These new traders individually may not amount to much, but collectively they have the power and money to make or break companies. While professional investors and hedge funds where betting against GameStop, an army of Reddit traders are making money, and lots of it.

A band of Reddit traders have put the short squeeze to Short sellers of GameStop. The net-of-financing mark-to-market losses is in the tune of a whopping $5 billion so far in 2021, and the company’s stock continues its historic run to new highs, according to data from the financial-analytics firm S3 Partners.

Losses totaled nearly $867 million on Tuesday alone as shares rocketed as much as 95% higher.

GameStop stock continued its climb on the back of retail traders and Reddit’s WallStreetBets army this week as the battle with short-selling hedge funds and investors continues.

The company’s shares initially leaped on January 11 after activist investor and Chewy co-founder Ryan Cohen recommended changes to modernize the business, including adding three new directors to the board.

Since then, GameStop shares have spiked more than 500%, drawing in swaths of retail traders looking to make a quick buck off a short squeeze of institutional investors.

The rapid increase in GameStop’s share price has left short-sellers with record losses. Still, over the last 30 days, the number of shares shorted in GameStop has actually increased by some 1.53 million, giving the company a short interest of nearly 71.79 million shares.

“We are still seeing a short squeeze on existing older shorts, with these more value-based short sellers trimming or closing their positions due to large mark-to-market losses,” said Ihor Dusaniwsky of S3 Partners. “But, for every short position that is closed and stock borrow returned, we are seeing extremely strong demand from new short sellers looking to initiate new short positions.”

The increase in shorts and continuing rise of the stock’s price has also caused fees to borrow shares of GameStop to increase to an unheard of 31%, with new shorts paying a fee of over 80%.

Short-sellers and Wall Street have struggled to make sense of the retail-trader phenomenon led by Reddit’s WallStreetBets crowd.

Only one firm, Telsey Advisory Group, has downgraded shares since they spiked earlier this month. And the Street’s median price target for GameStop remains at just $11.96 per share, implying analyst expectations for a crash of over 90% from current prices.

Still, as of Tuesday, nothing seems to be slowing down GameStop’s momentum, so it looks like it could be a long couple of days for short-sellers.

“If GME’s stock price remains at these levels or continues to rise, both value and momentum shorts will be squeezed out of their positions, and GME’s stock price will get the added boost of short buy-to-covers standing shoulder to shoulder with long buyers in driving up GME’s stock price,” Dusaniwsky said.

And now billionaire investor Chamath Palihapitiya has entered the fray, purchasing $115 call options that expire on February 19 in a bullish bet on GameStop.

The spike in GameStop has led some hedge funds into trouble. Melvin Capital required a $2.75 billion cash infusion from Steve Cohen’s Point72 and Ken Griffin’s Citadel to help it weather the losses from a short position.

Other companies that are resounding similarly around social media are Black Berry (BB) and AMC, who have already seen some substantial gains.