Blog Post

Investors around the globe have already come to know how Melvin Capital, Citadel Securities and Light Street Capital suffered massive losses at the hands of retail traders, who came together on social media platforms such as Reddit and Twitter and invested as a collective.

Multinational firms like these bet that the shares would go down in value, so borrowed the shares and then sold them without owning them, with the idea to buy them back at a lower price then return the shares and pocket the difference (short selling). The retail investors thought differently, and started supporting these stocks by buying in significant numbers to drive the price up.

According to the Financial Times, the hedge funds mentioned are expected to have lost a total of 6 billion USD since May 2021 due to short selling. The selection of shorted stocks includes AMC, CLOV, BBBY, CME and many more. It is not yet confirmed what will happen to these volatile stocks.

Gabe Plotkin, the founder of Melvin Capital, has extended the company’s losses to 49% by the first quarter of this year. The firm declined 53% in January as a result of the record rally in GameStop (GME). Plotkin was betting against the video game company following a short squeeze on a Reddit platform known as WallstreetBets. Although the company managed to recover with a 22% gain in February, it further slipped down to 7% in March. The fund had already closed their short position against the company GameStop (GME) in the month of January. In a battle against retail investors who came together on the Sub-Reddit WallStreetBets, the company’s asset fell from $12.5 billion to $8 billion.

Conspiracy theories going around the internet also say that Gabe Plotkin was backed up by Ken Griffith’s Citadel Securities with an investment of $2.75 billion and Steve Cohen's Point 72. However, after the losses suffered in January by Melvin Capital, Plotkin was left with a personal loss of $460 million.

One of the major causes for the company incurring such a huge loss was when retail investors from the Reddit forum came together, bought and held stocks driving the price up of the video game retailer, GameStop (GME). The hedge funds had taken a short position in these stocks, they had bet that the price would go down and not go up. They had borrowed the shares, sold them and were planning to buy them back when the price dropped, return the shares back to their owners and pocket the difference. This didn't happen, so the hedge funds had no choice but to either buy back the shares at any price or deposit funds into their margin account. When the price went up, the hedge funds were expected to pay a premium, called a margin call or close out their accounts by returning the shares they borrowed. The only way they could do this was to go back into the market and buy the shares, which drove the price even higher.

GameStop, however, was valued 400% higher in the month of January. Thus the company’s total estimated gain for the year is said to have risen to 1,625%.

Retail traders have now turned their focus to the other popular companies that have been shorted by the hedge funds. Ie Bed Bath & Beyond, AMC Entertainment and more.

Reddit’s WallstreetBets has seen more active users in recent times than before with the number skyrocketing from less than 2million to 7million by the end of January 2021. Retail investors are continuously discussing the possibilities and various trade options across various social media platforms.

Experts at My SocialPulse say that hedge funds could have avoided / minimized these huge losses by using social listening. My SocialPulse allows you to actually tune in to what expert investors are talking about trading on social media and make an informed decision. Had these hedge funds used the finance tool of My SocialPulse they could have saved themselves from suffering such huge losses.

To find out more: