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The big short: GameStop effect puts global bets worth billions at risk

Published 01/27/2021, 09:19 AM
Updated 01/27/2021, 09:20 AM
© Reuters. FILE PHOTO: A GameStop store is photographed in Austin, Texas

By Thyagaraju Adinarayan and Saikat Chatterjee

LONDON (Reuters) - Global bets worth billions of dollars could be at risk as amateur share traders challenge the bearish positions of influential funds, inflating stock valuations and leaving the professionals looking at potentially hefty losses.

Gone are the days when bruised retail investors fled after prominent hedge funds bet against a stock -- the GameStop (NYSE:GME) effect is rippling across U.S. markets and spreading to Europe.

Shares of the 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year, easily outperforming the rest of the market, a Reuters analysis of Refinitiv data shows.

Similarly, the best performers in Britain this week have been companies such as Pearson and Cineworld, in which investors also have sizeable short positions.

But share price surges such as the 700% year-to-date jump in U.S. video game retailer GameStop could potentially wipe out billions of dollars of those short bets.

Bets against GameStop alone amounted to more than $2.2 billion as of Monday, FIS' Analytics data showed, equivalent to more than a fifth of the company's market value.

However, the company's share price has quadrupled since the end of last week, reaching as much as $340 in U.S. pre-market trading on Wednesday.

"Most of the short positions are funded on margins. And so when markets run against you, you are stopped out if you are a short seller," said Kaspar Hense, a fund manager at BlueBay Asset Management, which runs $60 billion in assets.

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"A short position can exaggerate your losses if you are not actively managing your position."

Several traders have told Reuters that one of the reasons for the jump in the price of some shares is short-sellers buying back into the stock to cover potential losses -- the classic short-squeeze -- drawing in more retail investors hoping to ride the wave.

Short sellers typically borrow stocks to sell with a view to buying them back later when the price falls. The premium they pay to borrow the shares reflects the demand for them.

All the GameStop shares that would be available to borrow are are already out on loan, with traders estimating annual borrowing costs at 25%-50% of the company's share price.

Short-seller Andrew Left, who runs Citron Research and is one of the big names behind the bets against GameStop, shorted the stock when it traded around $40, expecting it to halve in value. He still has a short bet although he has covered the majority of the position at a 100% loss.

Melvin Capital Management also closed out a short position against GameStop at a 100% loss.

GameStop is not the only short bet that has turned sour. BlackBerry (NYSE:BB), Bed Bath & Beyond (NASDAQ:BBBY), AMC, Macy's (NYSE:M) and Cinemark Holdings (NYSE:CNK), have all risen anywhere between 100% to 250% so far this year.

In Europe, Evotec, Nokia (NYSE:NOK) and Varta have outperformed the wider market 2021.

Refinitiv data on performance of some stocks with high short interest:

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Company RIC YTD rise Short interest

GameStop 700% 100%

AMC Entertainment (NYSE:AMC) 400% 100%

Bed Bath 110% 62.8%

BlackBerry 250% 35.8%

Dillard's (NYSE:DDS) 100% 82%

Discovery (NASDAQ:DISCA) 35% 34%

Graphic: Smallcap index outperforms S&P 500 - https://fingfx.thomsonreuters.com/gfx/buzz/rlgvdgqqepo/Pasted%20image%201611745423311.png

Latest comments

hahaha these hedge funds now are selling the entire market and bitcoin to cover their asses 🤣 is hilarious.... me on the side jus buying that dip thank you wallstbets
That is not so, market bubble is not drawing in enogh longs to trap versus the short squeeze tricks the big boys have been doing themselves in this terrible economy, with help from Fed. They will let some air out then more games begin. They go after the majority of the money the majority of the time. Unlike us their computers read all order flow, stops and all. They are capitalixing on retail shenanigans with spreads, option tricks and can use the ETFs like XRT, options and algos to end this when they want and wipe all the retailers out, but for now it is making the majority of the big boys money. Becareful out there, you may be playing with fire. I have some experience with playing with fire myself.
We need to show this big hedgefunds that small pips can stand against em.
The reddit army is making the big hedge funds pay, while telling others to buy buy buy to cover their own loss. in the end the little guy who believes they hype gets screwed, it comes full circle.
I'm like the Michael Jackson meme eating popcorn. Staying on sidelines.
wow...this is so misleading....fact of the matter is GME is 77.5% owned by institutions and mutual funds....retail own not even 10%....top 5 shareholders are fidelity magellan, blackrock, vanguard, susquehanna and dimentional funds...this is an instituioanl battle that retail benefits....that's the truth
Time to buy puts, this crash is going to be spectacular.
the volatility in the stock alone will make it not worth your while.
the volatility in the stock alone will make it not worth your while.
Yeah hedge funds will lose big but also when ponzee scheme comes to an end also many ordinary people will find themselves bankrupt. Dont be too greedy , get out of stock before party ends
Buy moar!
Correction...if retail investors were the short sellers
Retail investors are long
People and politicians would be screaming for a ban on short selling if the roles were reversed and hedge funds were the short sellers.
Hedge funds are the short sellers. Reddit is doing a short squeeze.
U mean if it were business as usual? This is how they are screaming.
maybe the ppp loans these hedge funds take out will now be justified.
ponzi scheme. the ones that get their winnings NOW will profit, other retail inv will loose.
Very good.. Market makers manipulative frauds and they should be prosecuted under criminal charges. Bec of them lot of retailers went bankrupt. Now whatever happening is good and should be a lesson to them.
Hey Reuters, it is trading. Somebody gotta loose. Not everything is ‘investing’. Trading is like riding the wave. U get in when the wave comes, get out when the it dies out.
Where does it say anything different in the article?
thru out this is ‘investors’. Short sellers r traders. Reuters writers r so ignorant. They cant tell the diferrent between 2.
well they should have never shorted 140% of a stock. They play risky games, get risky results. GME to the moon.
it's about time those so called "professional" traders get their butts kicked and have a taste of their own medicine... Especially the "shorting" specialists.
so who is going to lose millions on the way down again? not hedgefunds...
it all depends on the number of the short contracts that the funds are exposed to. The retracement will always hurt the ones that bought at the top but that could be a small percentage of the total long position winners. Remember not everyone is participating in the daily buying. Lots of early shareholders that got in at very low prices are staying out of the latest shenanigans and happy to wait for the short squeeze to end and the price to retrace...
Make a bet. Hedgies already lost 180 million. I am loving this!
would love to see this happen to the Silver market
They are equally evil ! Destroying the price discovery mechanism, making the stock market non investable and ruined many retirees living dependences!
When hedge funds do it by releasing ratings, forecasts, and targets its called "price discovery." When the average joes get together and play the same game its manipulation.
The reason no one punish the banks and fund houses who cheated us by doing upgrading trap is because those social media bid up price group also benefit from it, they are part of the build up of the trap, who will punish them?
Bought and sold 100 sh of AMC this morning making a quick $1500. It's too scary to hold for long!
Ooops meant 1000 sh
Rather robbers are crying that theft happened
Good job, congrats!
Karma! Capitalism!
If the crime committed by hedge fund is bad, the crime committed by those Fund houses and banks who upgrade their holding stocks to cheat us to buy is equally evil, why no one punish them like this Reddit wave did? This is unfair!
The case of "Thieves are crying to be robbed." :))
I think the real Q is who's billions it is right??? that's when it gets headlined
Oh please stop crying wolf! what about the billions of retail money that is manipulated everyday
ignorance does not mean manipulation
hahahahahaha- good one!
 so what's happening with the ratings racket that is legitimised by GS/ Merril Lynch/CNN etc., etc and the same analysts sell for profits the stocks they are telling you and me to buy? Ofcourse its up to us to use our BS/ lie detector but the point is its lies/ manipulation...so in short (no pun intended) why cry wolf at the reddits - we should congratulate them for playing the game better-
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