The Robinhood App is all in the news. The app has been used by young traders to build portfolios through brokerage fee free trades. The app’s motto is “We’re on a mission to democratize finance for all.” Then the GameStop short squeeze happened and the hedge fund elites were exposed and Robinhood committed suicide.
Most of us who have savings and retirement accounts are in indexed funds. Our funds follow closely along with the returns of the Russell 2000, Nasdaq or S&P. We want our money as safe as possible. But, young folks, who are not risk adverse and can afford to start again, may choose to invest in hedge funds to get higher returns on their investments.
Hedge funds need managers. If Wall Street bankers are considered Masters of the Universe, hedge fund managers are Alpha Masters. Yes, there is a hierarchy.
The Robinhood App was founded in 2014 by former Stanford University roommates and 78% of the app users are under the age of 35. They like to invest in brands they know. Which brings us to GameStop.
I haven’t been in GameStop in ages and didn’t even know it existed anymore. When my son was a teenager and I was in my early gamer days, we bought hard copies of games the day they came out. Apparently, some people still do.
Reddit users found out that hedge fund managers were selling stocks in GameStop, Blackberry and AMC movie theaters short. When you sell stocks short, you are betting that the stock price is going to go down when you “borrow” the stocks. The Reddit users started buying the stocks, driving the stock price higher and putting a short squeeze on the hedge fund managers. The hedge fund managers were unhappy. This does not happen to the Alpha Masters of the Universe. They don’t get squeezed. They squeeze everyone else. They were not happy:
Short sellers betting against mall retailer GameStop have lost $5.05 billion mark-to-market in 2021, according to a note published yesterday by S3 Partners when the stock was 16% higher in intraday trading.1 Up over 600% since the start of the year on a surge of retail investor interest and resulting short squeezes, GameStop closed up 93% yesterday and is set to continue its mind-bending run higher today.
One of the biggest GameStop short seller “victims” is Melvin Capital, a hedge fund that started the year with $12.5 billion in AUM and lost almost 30% through Friday last week, according to The Wall Street Journal.2 It announced an emergency infusion of $2.75 billion from fellow hedge funds Citadel and Point72 on Jan. 25, and told CNBC today that it closed out its short position in GameStop on Tuesday afternoon.
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