How GameStop Took Down A Massive Hedge Fund
Learn how GameStop was able to successfully take down one of the most powerful hedge funds on Wall Street.
This article is more than 2 years old
No one could get away from the media storm surrounding GameStop’s ascending stock in 2021. Amateur traders were able to cash in on low-performing stock to accelerate its value, skyrocketing GameStop’s value to an unfathomable degree. Many Reddit users grouped together for this triumphant maneuver, to the dismay of big Wall Street investors. Since then, the craze has mostly died down, but the impact is still being felt today.
Melvin Capital Management, a giant hedge fund, has felt the negative impact of GameStop’s meteoric rise in 2021. The fund is closing its doors soon, unable to make a comeback from the economic disruption of 2021’s amateur trading frenzy. The decision to close down was announced this past Wednesday in a letter penned by Melvin Capital Management owner Gabe Plotkin. The letter directly addressed clients on the hedge fund’s decision to shut down but didn’t further elaborate on why.
Melvin Capital Management experienced one of the most considerable impacts from Reddit’s stock-trading bonanza. As stocks for GameStop and AMC went up astronomically due to the collective Reddit army, many humungous funds had a shocking stock plummet. Melvin Capital Management was one of those severely affected, with $12 billion in cash in January 2021 that was reduced by 53% by the end of that month.
The strategy was catapulted by a subreddit called r/wallstreetbets. The subreddit encouraged people to bet collectively on stocks doing poorly like GameStop and AMC, which skyrocketed their value while negatively impacting others who bet against them. Melvin Capital Management received a massive turnaround in value which propelled the hedge fund to shut down for good. “The past 17 months have been an incredibly trying time,” Plotkin said in his recent client letter. But since he couldn’t give adequate returns to his clientele, the best course of action was to close the hedge fund permanently.
Though many expected a massive overhaul of Wall Street due to the persistence of amateur traders, the transformation never occurred. Certain hedge funds did lose billions of dollars, but the reverse of control that Reddit users expected didn’t happen. The GameStop frenzy did have a substantial financial impact and showed the world how precarious the stock market truly is. But at the end of the day, wealthy executives working on Wall Street still have that market under their control. To this day, GameStop stocks are still higher than they were in January 2021, closing out at around $98 per share at the beginning of 2022.
Even if thousands of Reddit users joined in to keep buying GameStop stock, other video game enterprises are doing more successfully due to their prominence in the marketplace. Companies like Sony and Microsoft don’t need amateur traders on Robinhood to build up their stock since they’re constantly innovating new products and technologies. Both companies are also undergoing powerful partnerships with other tech corporations, boosting the incentive for investors to buy their stock.
Though the GameStop phenomenon was an exciting new course of action for many, it didn’t have such a longstanding impact. The Reddit surge plunged certain hedge funds into bankruptcy because they were betting against GameStop in early 2021.
