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| Economy |
| The GameStop Saga: The Retail Investors Strike Back |
| 2021-01-30 |
| [American Thinker] Hedge fund managers are currently learning a lesson the hard way. As reported by Reuters, hedge fund Melvin Capital Management "suffered heavy losses by betting against video game retailer GameStop." Here’s how that happened. Hedge fund Melvin Capital had opened a large short position (i.e., it sold borrowed stock) on GameStop in hopes that the price would fall and it could buy the stock at a lower price in the future to profit on the difference. Instead, GameStop’s stock price increased meteorically. Facing unknown and unlimited risk, the hedge fund had to cut its losses by closing its short positions, i.e., paying a much higher market price for the stock they’d borrowed and sold, thus absorbing heavy losses. These losses were so heavy that Melvin Capital had to secure billions in "rescue capital" from other prominent hedge funds, according to the New York Times. These hedge funds are collectively such influential players in the stock market that this event had ripples felt throughout the marketplace, manifesting as a declining market even as GameStop’s stock surged. As Naeem Aslam at Forbes observes, covering these short positions requires the "liquidation of long positions in hedge funds," which causes a "broader sell-off" in the market. This type of thing isn’t new, he writes. "In 1902, we also saw an episode of this when Northern Pacific stock price increased several times while the rest of the market crashed." From transcontinental railroads to video game retail stock, there’s not much which has changed about short selling in the marketplace, conceptually. And right or wrong, there’s always been a public assumption of devious intent applied to anyone engaged in the business of selling short. As Daniel Defoe wrote in The Political History of the Devil (1726), "every dissembler, every false friend, every secret cheat, every bearskin-jobber, has a cloven foot." And today, there are few entities more detested among the contemporary public than hedge funds. Though I personally believe that short sales are a natural and enduring feature of a free marketplace, it’s easy to see why our natural human inclination is to be suspicious of someone who has an economic interest in the failure of another enterprise. This feeling is only amplified when those seeking the failure of another enterprise for the sake of profit are those who seem to need profit least. Now, consider this in the context of how the everyday American sees this. And, more to the point, how two million enterprising young professionals might see this. |
| Posted by:Besoeker |