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A London-based hedge fund that took on heavy losses betting against GameStop in January has closed its doors, the Financial Times reported Tuesday, becoming one of the first casualties of retail traders’ piling into unpopular or heavily-shorted “meme stocks” that saw some financial mainstays lose billions.
GameStop is a popular meme stock.
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Key Facts
White Square Capital will close its main fund this month after a review raised concerns over the viability of its business model, head Florian Kronawitter wrote to investors, the FT reported.
Kronawitter said the decision was “related to thinking the equity long-short model is challenged,” the FT reported, a strategy where traders bet some stocks will rise over time (long) while others will fall (short).
White Square was one of numerous funds to take on double-digit losses on the short part of this model in January, as armies of coordinated retail traders targeted stocks—including AMC Entertainment and GameStop—that mainstream financial institutions had bet against, known as short selling.
A person close to the fund told the FT the fund had made back “a fair share” of the losses and the decision to close was not related to the meme stock rally.
Nevertheless, White Square is one of the first funds hit by the meme stock rally to close, though a number of financial heavyweights, including Wall Street’s Melvin Capital and Light Street Capital, suffered heavy losses on short positions in the surge.
White Square did not immediately respond to Forbes’ request for comment.
Crucial Quote
In explaining his reasoning to investors, Kronawitter said “there are way too many fish in the pond with the same strategy” to pursue a long-short model. “The traditional edge of hedge funds has been eroded by “an oversupply of capital,” he reportedly added.
Key Background
Trading platforms like Robinhood have made investing, typically the purview of financial institutions, more accessible to the general public. The strategy and attitudes of these retail traders, many using Reddit forums to inform their trading, also differs from more traditional institutions, which balked as thousands piled into seemingly nonsensical stocks, sometimes in a concerted bid to drive out and penalize Wall Street mainstays. Meme companies included the bankrupt Blockbuster, GameStop, BlackBerry and AMC, which soared to sky-high valuations. Fading interest saw prices for meme stocks plummet weeks later, though there has been sporadic interest in meme stocks since, including another frenzy in June.
Further Reading
Hedge fund that bet against GameStop shuts down (FT)
Meme Stock Saga Officially Over? GameStop Short Interest Plunged 70% Amid $20 Billion Loss (Forbes)
The New Meme Stocks: Clover Health Hits Record High—And Then Falls—As Reddit Mania Intensifies (Forbes)
Source: Forbes
