There was a time when a billion dollars was a lot of money on Wall Street. A big hedge fund would bet a billion and small-time investors would step back because they knew they could not fight it. These days, with Reddit, Twitter, Facebook and other social media, it is possible to organise millions of traders. The collective power of 20 million young connected retail investors with an average US$1,000 ($1,330) to US$5,000 in their account, is far bigger than most large hedge funds. Rookie investors making big, audacious bets and willing to organise themselves on social media are taking on well-known hedge funds and winning.
Last week, Melvin Capital, a New York-based hedge fund with US$12.5 billion under management, collapsed because it had built a huge short position on video game retailer GameStop whose shares were ups 1,700% last month and 8,000% over the past year. Melvin, which lost US$6.3 billion, or 53% of its assets, in January, was bailed out by two large hedge funds who injected US$2.75 billion. Short-sellers betting against GameStop have so far lost US$20 billion.
GameStop’s stock became one of the heavily shorted stocks on Wall Street in 2020 as hedge funds bet that the bricks-and-mortar retailer would soon go broke. A bunch of young traders noticed that short interest in the stock was 100% of GameStop’s available shares, or free float. So, they began placing contrarian bets that it would soon be revived. Last August, pet supplier Chewy’s co-founder, Ryan Cohen, emerged as a white knight. The stock surged and suddenly, there was a short squeeze as hedge funds rushed to cover their short positions by buying more shares.