Nail in the Coffin
Around a year and a half ago the infamous WallStreetBets investment saga began. Shares of GameStop and AMC Entertainment went on a wild ride, with GameStop’s stock seeing an over 2,300% increase in two weeks, and AMC Entertainment’s stock seeing an 800% increase in two weeks. Considering GameStop was a struggling company, and AMC Entertainment was facing the harsh repercussions of the pandemic, many investors were surprised to see such massive growth in the struggling companies.
Institutional investors at Hedge Funds held a pessimistic outlook for GameStop and AMC’s financial health, so the investors shorted the two stocks. Retail investors on the social media platform Reddit noticed the number of shorts placed on the two stocks and figured if enough people bought GameStop and AMC, the stocks would skyrocket in what is known as a short squeeze. One of the hedge funds taking a significant short position on GameStop was known as “Melvin Capital” and it became an almost meme-powered mission on the WallStreetBets Subreddit to take them down.
Over a year later Melvin Capital was still struggling from the brutal losses incurred during their GameStop short squeeze. In response, founder Gabe Plotkin planned to bring back the Hedge Fund slowly and make up for the lost money. Unfortunately, this mission has recently come to an end, with Melvin Capital failing to recoup its losses and shutting down shop. Founder Gabe Plotkin released a letter to investors stating: “The past 17 months has been an incredibly trying time for the firm and you, our investors” and “I have given everything I could, but more recently that has not been enough to deliver the returns you should expect. I now recognize that I need to step away from managing external capital”.
What do you think about Melvin Capitals’ collapse? And does this reaffirm the power of retail investors working together?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.