Melvin Capital Management was betting on GameStop Corp. since 2014 and still believes online video game downloads will surpass the retailer’s business model, the hedge fund founder said in an early copy of his testimony at the congress made public on Wednesday.
Gabe Plotkin’s Melvin Capital lost more than 50% of its investments in January, due to accumulated losses from its short bets against GameStop and other companies. GameStop had been promoted on the Reddit forum WallStreetBets and some other social networking platforms, with rising stock prices hurting the return of several well-known companies, such as Point72 Asset Management by Steven A. Cohen and D1 Capital Partners by Daniel Sundheim.
The action on GameStop was driven in part by an army of bullish traders who urged each other on platforms like Reddit to buy stocks and options and squeeze Melvin, a particular target of the posters. GameStop’s seemingly relentless march upwards also created what marketers described as a kind of contagion effect. Managers lost confidence in their short positions and hedged these bets, while reducing their stakes in other companies to reduce the risk of their portfolio.
GameStop’s seemingly relentless march upwards also created what traders described as a sort of contagion effect, with executives losing confidence in their short positions and covering those bets. These managers also cut their stakes in other companies to reduce the risk of their portfolios.
The episode has raised questions about market integrity and sparked federal investigations into possible market manipulations. Prosecutors have cited information from brokers such as Robinhood Markets Inc., the popular online brokerage that many investors used to trade GameStop and other stocks.