This hedge fund earned $ 700 million at GameStop

The rise of GameStop often turns into an amateur triumph over professionals. Which it was, to some extent. But it was also a trade that pitted professionals against other professionals, and few have made more money than Senvest Management LLC, the firm of Messrs. Mashaal and Gonick.

“When he started his march, we thought there was something here,” Mashaal, 55, said. “But we had no idea how crazy this thing would get.”

Senvest’s interest in the video game retailer was aroused with a presentation by the new GameStop executive at a consumer investment conference in January 2020.

At the time, most Wall Street analysts had rated the video game retailer as “retained” or “sold.” The actions were also very short. Messrs. Mashaal and Gonick would know that some of Wall Street’s most profitable hedge funds, including Melvin Capital Management, were bearish in the actions of regulatory disclosures.

But as they spoke with management, they destroyed competitors and noted the involvement of activists in stocks, including Chewy Inc. co-founder Ryan Cohen, they finally started buying. At the end of October, Senvest owned more than 5% of the company, paying less than $ 10 per share for most of the shares.

They thought that if GameStop could hold out until the next generation of video game consoles came out and sparked the demand for games and accessories, the company would get a boost. And they reasoned that if Mr. Cohen could help transform GameStop from a primarily brick-and-mortar operation into an online gaming destination, the company could be worth a lot more.

Messrs. Mashaal and Gonick had been at a wrong point in the short press before in Senvest. One case was with opioid manufacturer Insys Therapeutics Inc., although they eventually made money with their short position. GameStop shares could rise if they were caught in a situation where their price rise forced bearish investors to start buying shares to curb their losses, they thought.

GameStop is now Senvest’s most profitable investment for dollars earned and for its internal rate of return, a performance metric that takes into account the duration of an investment. It has boosted the firm’s flagship fundraising fund from managing $ 1.6 billion by the end of 2020 to $ 2.4 billion. For the month of January, the fund returned 38.4% after commissions.

The dominant narrative that has come out until January so far has been to turn around the natural order of bites on Wall Street, with hedge funds facing significant losses and individual investors facing victory after grouping together to raise the price in a handful of stocks once left for dead. But even before this week’s weakening in the rally, the reality was more nuanced.

Mudrick Capital Management LP, a more than $ 3 billion New York hedge fund that provided a lifeline to AMC Entertainment Holdings Inc.

in December, it earned nearly $ 200 million largely on AMC in January. The movie chain, which had been battling bankruptcy, had been one of the favorites of retail people recently.

Mudrick’s gains come primarily from its AMC debt holdings, which rose last week as the price of AMC shares skyrocketed. The fund also earned about $ 50 million to write and sell call options on AMC and GameStop shares it owned.

One investor said PlusTick Management in Charlottesville, Virginia, which manages a stock exchange and stock exchange hedge fund that manages about $ 120 million, gained 20% in January. Part of its earnings came from existing stakes in companies, including BlackBerry Ltd.

and the harassed owner of the Macerich Mall Co.

Both companies have recently been promoted on message boards.

“You always pinch yourself until the last day of the month to see if it will hold,” teammate Adrian Keevil said.

Other funds jumped into trading GameStop’s weekly call options and in some cases benefited, traders said. Given the volume of shares and options traded on GameStop and other names, they say, individual investors directed only part of the activity.

“It’s not just small people here. There are huge players playing on both sides of GameStop, “said Thomas Peterffy, president of Interactive Brokers Group Inc.

Senvest Management was founded in 1997 by Mr. Mashaal with an investment from Senvest Capital, based in Montreal,

his father’s investment firm. Gonick, his former college roommate, joined as co-investment director in 2008.

Senvest invests in 25 to 30 companies at a time. The pair describes the fund as an opposing investor focused on value investing or the discipline of buying cheap stocks that they believe will end up producing higher returns. They say they actively discourage their team from attending idea dinners and socializing with other people in the industry, which they say leads to group and crowded thinking positions.

According to a person familiar with the fund, the main hedge fund has had an average of approximately 18.3% annually for investors until January. It is also highly volatile. It lost 24.1% in 2018, but rose 18% the following year, according to an investor document.

Senvest’s approach doesn’t mean they are above talking to others about investment ideas when it works in their favor.

Brian McGough and Jeremy McLean are analysts at Hedgeye Risk Management, a firm in Stamford, Connecticut that sells independent research to institutional and individual investors.

On Dec. 17, when GameStop shares closed at $ 14.83, the pair announced that they were adding GameStop to their long list of “Best Ideas.” The following week they made an hour-long presentation explaining why they thought the shares might be worth $ 100.

Unbeknownst to Hedgeye’s clients, Senvest had recently submitted GameStop to Hedgeye, presenting his thesis for action.

A person familiar with Senvest said Hedgeye made an independent call to recommend GameStop. However, in doing so, Senvest is likely to play an important role in driving some individual investors to GameStop.

“I have a lot of respect for Senvest,” McGough said. “We examined it independently and came to a similar conclusion.” He said “it’s not terribly common” to be argumentative ideas.

Once the concentration at GameStop began, a steady pace of evolution made Messrs. Mashaal and Gonick begin to think about rescuing themselves from the actions. The two men clung to their screens following the action. They surfed or made snowshoes to release the steam.

When Citadel LLC, Citadel Partners and Point72 Asset Management last Monday invested $ 2.752 billion in Melvin Capital, which was suffering heavy losses, Messrs. Mashaal and Gonick suspected that Melvin had left his GameStop position and wondered how much ‘impulse short coverage could be left.

After the market closed on January 26, Elon Musk, CEO of Tesla, tweeted “GameStonk !!” a shout out to Reddit WallStreetBets forum users, who had put their support behind GameStop.

Senvest, who had gradually reduced his position, decided to leave completely.

“Given what was going on, it was hard to imagine him going any crazier,” Mashaal said.

On Wednesday afternoon, the firm shared with its customers the news of its robust GameStop profit.

Despite the disappearance of the rally this week, Senvest said GameStop’s story will change part of the way they do business: the firm will pay close attention to whether individual investors are discussing a stock on the message boards before bet on it or against it.

“I wouldn’t expect that impact to end,” Gonick said.

—Geoffrey Rogow contributed to this article.

Write to Juliet Chung to [email protected]