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White Square Capital, a hedge fund that bet GameStop stock would go down in January, has been forced to close down.
According to The Financial Times, the London-based hedge fund experienced double-digit percent losses from its attempts to “naked short” the U.S. video game store chain. Simply put, it placed positions that would make money if the stock price of the company went down. But huge numbers of small investors, who communicated on Reddit and other platforms, didn’t sell in enough numbers for the hedge fund to win their bet.
Small investors targeted and rallied around firms on social media, causing shares to soar rapidly in some cases, resulting in the phrase “meme stock” being coined. Analysts, including some with ties to big Wall Street players taking hits by betting against companies like GameStop and AMC, argued that the companies were not seeing investments for sound fundamentals or growth potential.
But the talking down didn’t deter investors. That forced several hedge funds with short positions — when a stock is sold early and then bought back later in the hopes of profiting from a decline in price — to liquidate their positions in order to avoid severe losses.
White Square has written to investors to warn that it will close its primary fund and return money. Created by Florian Kronawitter, a veteran trader at Paulson & Co, the fund has $440 million in assets under management. White Square is reported to be one of the first hedge funds to close following the severe price changes.
GameStop Raised 1.1 Billion in Stock Offering
There was more good news for GameStop backers. The company raised more than a billion in its most recent stock sale this week. GameStop shares, which were trading for around $20 earlier in the year, approached $220 on Tuesday after surging another 9% at the opening bell on news of the capital raising.
In addition to raising funds, GameStop is changing course in an attempt to keep up with evolving technology that threatens the company’s survival, including downloading and cloud hosting of games, rather than store purchases of game discs, which the company has long specialized in selling.
In a cap to GameStop’s very good week, Robinhood, the free trading app which cut-off trading several times as insurgent young investors drove meme stocks higher, was delayed from a public offering of their own stock. The FTC cited concerns over Robinhood’s cryptocurrency trading as a reason for closer scrutiny. Robinhood has allowed crypt trading in Bitcoin, Ethereum and other cryptos for the past three years.
During the GameStop swings in January, it was found that Robinhood had a financial relationship with Citadel, one of the hedge funds taking losses (via a related hedge fund Melvin Capital) from betting against a number of the so-called meme stock companies.
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