A hedge fund, which had bet on the death of a video game brand, is disappearing. The investment fund, which had suffered heavy losses after a vast mobilization of Internet users on Reddit, failed to recover.
Long before the inoffensive Pixel War on R/Place which pitted the French against the Spaniards around pixel art, Reddit was the scene of a completely different battle, with much more concrete effects. The proof: it appears today that the activism of Internet users belonging to the R/WallStreetBets community has ended up having the skin of a hedge fund. Just that.
The case is reported by the New York Times, in its edition of May 18. We learn that Melvin Capital is going out of business, for lack of the ability to recover after being torpedoed in early 2021 by Internet users unleashed against him. Gabe Plotkin, the chief investment officer and portfolio manager of Melvin Capital, announced this in a letter.
Bet on the death of GameStop
Melvin Capital, an investment fund, was launched in 2014: it was managing $12 billion in assets at the start of 2021 and one of its tactics was to bet on the collapse of the GameStop brand, which is the equivalent of a network like Micromania. It is true that these shops were in great difficulty. No one rushed to pick them up.
Melvin Capital’s bet was not absurd: these shops specializing in video games find themselves faced with the explosion of dematerialized sales. The public is more and more inclined to buy games on platforms (Steam, the PS Store, etc.) rather than in stores. In fact, the trajectory of these stores seems very similar to that of video clubs.
But that was without taking into account the facetiousness of internet users. In early 2021, individuals gathered in specialized communities, such as R/WallStreetBets, bought shares of GameStop en masse, despite its moribund profile. GameStop’s share price rose as a result (which eventually caught the attention of the regulator, suspecting market manipulation).
And it paid off. As of January 2021, the investment fund recorded a loss of 53%. At the time, Melvin Capital was able to keep its head above water with help from other hedge funds and investors, Point72 and Citadel. In all, the amounts injected reached $2.75 billion. A considerable bailout, especially given the origin of the problem.
In the battle, another victim was recorded: Robinhood. This is a dedicated trading app that found itself at the heart of the controversy between Reddit and Wall Street. She was accused of obstructing the orders placed by Internet users, aimed at thwarting the strategy of Melvin Capital, precisely because she has links with Citadel, which owns Melvin.
Since then, Citadel and Point72 had recovered their investment in Melvin Capital. If the blow dealt by R/WallStreetBets was not enough to finish off this hedge fund, however, it still reduced it. Perhaps he could have survived if he had had better positions on the stock market. However, notes Bloomberg, the fund has collapsed since April, by 23%.
Five of the top six positions held by Melvin at the end of the first quarter are stocks that have fallen more than 10% this month. The sixth fell 8%. Bad intuitions thus precipitated the fall of a group which had already been weakened since the battle around GameStop. Ironic to see that this sign will survive him.