Markets: London Hedge Fund Closes After Sour GameStop Bet

  • General
  • June 22, 2021
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  • 5 minutes read

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A London-based hedge fund managing a few hundred million dollars is closing its doors following a soured bet against GameStop, the “meme” stock that’s been propelled way up in a frenzy led by retail investors.

  • White Square Capital, the hedge fund, is shuttering its main fund after reviewing its investment strategy, the Financial Times reported on Tuesday. The fund had managed $440mn at its peak but suffered double-digit percentage losses this year from a short position on GameStop. 
  • White Square is one out of several hedge funds that racked up big losses from GameStop short positions after the stock was driven up in a retail trading frenzy seemingly as an act of “revenge” by the small guys against the big guys. The hedge fund at the forefront of the saga, Melvin Capital, reportedly lost 50% in January.
  • As it looks, White Square’s shut-down wasn’t exactly due to its soured GameStop bet, the Financial Times reported, although the losses could have contributed. The firm had seen major investor withdrawals last year as it competed for business with cheaper alternative investment services.
  • “The decision to close down is related to thinking the equity long-short model is challenged,” White Square’s Chief Investment Officer Florian Kronawitter said in a letter to investors. “There are way too many fish in the pond with the same strategy of long-short,” he said. “The traditional edge is being arbed away [eroded by other investors], there’s an oversupply of capital.”
  • White Square’s shuttering is one of the first closures by a hedge fund that lost significantly from the rise of so-called “meme” stocks. To the unaware, they are stocks hyped up by investors, usually retail traders, that soar often without regard for their underlying financial metrics.
  • GameStop (NYSE: GME), a video game and consumer electronics retailer, is one of two major meme stocks in the US markets, the other being movie theater chain AMC Entertainment (NYSE: AMC).
  • GameStop has risen more than 1,000% year-to-date, now with a market cap of $15bn. Its meteoric rise coincided with the company accelerating its push from brick-and-mortar retail into e-commerce.
  • GameStop as a company has capitalized very much on its “meme” stock status by raising over $1.5bn from share offerings this year.

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