Hedge Funds May Have Taken A Minimum Of $5 Billion in Losses to Redditors

Hedge Funds May Have Taken A Minimum Of $5 Billion in Losses to Redditors

Hedge fund managers may have now lost more money than is the net gross domestic product of 44 countries thanks to the work of a motley crew of redditors.

Net losses for the Wall Street goliaths, while not close to being entirely tallied, have currently amassed to around $5 billion at minimum, according to data analytics company S3.

The brutal losses came after the hedge fund managers were outmaneuvered by small-time investors working en masse via Reddit’s r/WallStreetBets page. The host of internet investors correctly identified that a clutch of hedge funds had placed titanic, short-term bets that struggling video-game retailer GameStop would sink in value.

Jumping on the opportunity, the little investors piled in and bought GameStop stock in bulk, creating a surge in the company’s valuation. The strategy worked, with GameStop stock surging in value to more than 1,700 percent of what it was at the start of the year — and forcing the shorting Wall Street hedge funds to sell at the inflated prices. Through this, the giant hedge funds in question lost the equivalent of the GDP of Sierra Leone.

For context, what is generally considered the most successful heist in history, the Antwerp Diamond Heist, stole about one-fiftieth of the amount these funds are currently estimated to have lost.

Some of the reddit betters, at least according to their own accounts, have made fortunes from the strategy.

GME YOLO update — Jan 27 2021 ————————————— guess i need 102 characters in title now from wallstreetbets

The losses came from some of the most profitable hedge funds in the world. The firm that received the heaviest blow was $13 billion firm Melvin Capital, which is ran by Gabriel Plotkin, one of the best-paid managers on Wall Street with a net worth of $300 million in 2017 according to Forbes.

His firm was forced to close out their short position on Wednesday at the comically inflated rate, with the company still refusing to reveal how much was lost to the internet’s newest millionaires. The firm’s hedge fund peers had to infuse an unprecedented $3 billion into the asphyxiating goliath to keep it solvent. Just last month, it finished 2020 with more than 50 percent in returns after taxes, according to the Wal Street Journal, despite the ongoing economic crisis.

The move has been subject of extreme controversy, as the firms keeping Melvin alive are now alleged to have worked to shut down the small traders by blocking sale of GameStop stock on micro-investing platform Robinhood.

Plotkin might find comfort in company at least. While it’s currently impossible to say exactly how much of the loss is due to being outmaneuvered by Reddit, a host of Wall Street goliaths who made massive short bets are now taking stunning losses out of the blue. From the start of this month, $3.5 billion hedge fund Maplelane Capital has lost 30 percent of its value. $2.8 billion Candlestick Capital has fallen 10 to 15 percent, and $17.2 billion Point72 Asset Management has declined 10 to 15 percent.

The actions have united the American public, politicians, and even Elon Musk behind the redditors’ charge. They’ve also drawn attention to what some see as unfair practices carried out by the hedge funds in question even before their bets collapsed.

Questions still swirl around the legality of the hedge funds’ behavior, particularly their alleged work at pressuring brokers into shutting down the sale of GameStop stock to staunch their bleeding, which is illegal. Congress members as far apart as Sen. Ted Cruz and Rep. Alexandria Ocasio-Cortez have called for hearings on the issue, and the Senate is planning one currently.

Jonah Gottschalk is a student of Modern History and International Relations at the University of St Andrews.
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