Hedge Fund Melvin Capital Lost Over $4 Billion Amid GameStop Chaos

By Mariliana Fotopoulou Monday, February 1, 2021

Melvin Capital Management, an investment management company, has reportedly incurred a loss of 53% in January due to aggressively short-selling GameStop stock and a handful of other securities that skyrocketed in January.

A concrete dollar sign dissolving into pieces.

Heave Losses

The hedge fund suffered a heavy loss after a large group of retail investors decided to drive up the prices of GameStop stock and shares of other companies with a high selling interest. Shares of the video game retailer ended up 400% last week, amounting to a total gain of 1,625% year-to-date. Company shares ended the Friday session at about $325.

According to the Wall Street Journal, Melvin Capital closed its short position on the retailer after suffering a heavy loss. A month ago, the GameStop stock price was trading around the $20 mark.

Furthermore, hedge funds Citadel and Point72 injected $3 billion into Melvin Capital to help recover its finances. Point72 also sustained a loss of 10% in January, while Citadel slipped 3% in the same month.

Melvin Capital started the year with around $12.5 billion in assets under management (AUM) and that figure has now declined to around $8 billion, including emergency funding, and after some investors infused additional funds into the business at the end of January.

Retail investors have been joining the Reddit “WallStreetBets” forum to plan their trades and boosted the prices of a handful of stocks, including GameStop, Bed Bath & Beyond, Nokia, and AMC Entertainment. The community user base tripled within a week to more than 7 million.

Moreover, online trading company Robinhood initially announced it was temporarily prohibiting the trading of a group of securities, including GameStop, after a Wall Street clearinghouse increased deposit requirements for equities by tenfold.

Robinhood’s decision triggered outrage and discontent among its users, but the online broker said it made the decision in the best interest of the company and its clients.

“We did this because the required amount we had to deposit with the clearinghouse was so large — with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements — that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements,” the company said in a Help Center message.

However, the online trading business then moved to allow limited buying of these securities, including GameStop stock.

At the moment, Robinhood customers who already own shares of GameStop are allowed to purchase only a single share of the company and up to five options contracts. The business also slashed the number of stocks restricted for trading from 50 to 8.

Summary

Hedge fund Melvin Capital sustained a 53% loss in January after shares of GameStop and a group of stocks substantially rallied last month, which the fund was aggressively betting against.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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