The hope of GameStop’s downfall – now the hedge fund must close its doors

Reddit users and other hobby investors started a bitter battle against the established Wall Street elite in January. It all happened when the GameStop stock shot up, while several hedge funds lost so it sang. Half a year later, one of the funds has had to throw in the towel.

As the Financial Times reports, White Square Capital has informed its investors that the doors will close after a review of the business model. At most, White Square managed $ 440 million worth of stock – just over $ 3.75 billion – but the GameStop drama led to huge losses.

Short sale

A strategy where you sell shares you do not own against a promise that you will buy the share back later. With this strategy, you profit from a decrease in price, but if the price goes up, it is bad news. Short sellers therefore usually pick out a stock that is doing really badly, as the GameStop stock did before Reddit came on the scene.

White Square was by no means the only fund that lost money on so-called short sales of the Gamestop share – which went from less than 20 dollars per share to more than 480 dollars at most. The prestigious Melvin Capital was among those who suffered huge losses, and eventually had to get help to avoid bankruptcy.

A source with knowledge of White Square admitted to the Financial Times that the closure was not a consequence of the GameStop situation. Apparently, White Capital earned a good portion of the losses, and the fund should have recovered quickly.

– The decision to close is based on the idea that the shorting model has been challenged. There are too many players with the same strategy. The advantage one has traditionally had is worn away by other investors, and there is too much money in circulation, it is stated in an internal letter from White Square CEO Florian Kronawitter.

At the same time, GameStop reports that it has earned a good chunk of money after selling its own shares. In total, the company sold five million shares, and was left with just under NOK 10 billion before expenses.

Before the stock drama, GameStop had struggled for a long time.
In 2019, the chain closed all stores in Norway »