The Big Short-Squeeze: US Hedge Funds Lose $70 Billion in January Betting Stocks Will Fall

The Big Short-Squeeze: US Hedge Funds Lose $70 Billion in January Betting Stocks Will Fall

GameStop’s stock has jumped nearly 400% in the last business week, with a 70% gain on Friday alone, despite numerous attempts by brokerage firms to limit traders’ ability to buy stock in the struggling video game vendor. Paradoxically, this has caused several institutional investors to lose billions for betting against its success.

The battle between small-time online stock traders and professional Wall Street investors has taken its toll on institutional investors, with hedge funds registering an estimated $70.87 billion in loss in the past month alone, thanks to a short squeeze, according to financial data analytics firm Ortex, with $19 billion of that just on shorted GameStop stocks.

That’s what’s happened with a number of commonly short-sold stocks over the last few weeks, including American Airlines, AMC Theaters, Bed, Bath & Beyond, and GameStop, which amateur investors coordinating on the WallStreetBets subreddit banded together to buy the stocks of and hold, driving up their value. For small-time investors, the ballooning stock prices have become life-changing windfalls that have enabled them to afford expensive medical procedures and escape debt while simultaneously thumbing their nose at institutional investor giants that sought to gain through the failure of the stock. 

Those losses are theoretical, as few of the debts have so far been realized. However, professional investors are said to be furious about being the giant in this David and Goliath situation.

Massachusetts Secretary of the Commonwealth William Galvin told CNBC on Wednesday there should be a 30-day pause on trading GameStop stock because it “undermines the system.” He said the volume of short positions taken on GameStop by institutional investors creates structural risk and “has to be addressed immediately” because it “creates uncertainty in the marketplace.”

Left claimed that he closed out of his position on GameStop on Wednesday evening, stating that he had accounted for nearly all of his losses. However, another hedge fund, Melvin Capital, lost some $3.75 billion before claiming that it too had closed out on Wednesday, according to the Financial Times.

Professional investors, however, found an unexpected ally on Friday in Massachusetts Democratic Senate Elizabeth Warren after she called on the Securities and Exchange Commission (SEC) to investigate independent trading done by participants in the WallStreetBets subreddit, as well as into the massive short selling of GameStop stock.

In the aftermath of the 2008 financial crash, widely blamed on hedge funds for adding too much risk to the banking system, Warren spearheaded the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the creation of the Consumer Financial Protection Bureau to monitor their investment practices.


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