GameStop has been the talk of the financial world the last two weeks, with its stock price soaring thanks to a bizarre battle between Reddit day traders and investment firms betting against them to fail. So far, those who have been fortunate enough to buy low on the stock have seen huge gains, and Reddit is filled with screenshots of people making big calls and paying off their student loans in the process.
But one company that has taken a big hit is no stranger to betting on failures in the video game world. As amateur day traders strike it big on GameStop, large firms shorting the stock are losing trillions in the process. And according to the Wall Street Journal, a hedge fund that bet big against GameStop has essentially needed rescuing because it lost so much money on the short so quickly. On Monday, Melvin Capital Management got a $2.75 billion investment from two other companies, Citadel and Point72, after Melvin took huge losses on several short bets that have gone for huge losses. The one noted in the story, of course, was GameStop.
The influx of cash is expected to help stabilize Melvin, which in 2021 has lost 30% through Friday, said people familiar with the firm. Melvin started the year with $12.5 billion and had been one of the best performing hedge funds on Wall Street in recent years. The losses stem from Melvin’s array of short bets against companies and have stunned clients and other traders. Among other short positions, Melvin bet against the surging stock of videogame retailer GameStop Corp.
Interestingly, that same hedge fund made millions off of the disastrous launch of Cyberpunk 2077. According to Financial News London, Melvin Capital made $25 million shorting CD Projekt Red stock as the price plummeted in the wake of the game’s buggy launch and bad publicity.
New York-based Melvin Capital Management held a short position representing about 0.6% of shares of Warsaw-based developer CD Projekt Red as of 22 September. Melvin was founded by Gabe Plotkin, a former protégé of hedge fund titan Steve Cohen.
The game launched on 10 December, when CD Projekt Red’s share price sat at 390 Polish zloty (£79.30).
By 15 December, after waves of negative reviews and playthroughs, the firm’s share price had reached a low of 238.50 zloty — translating to a windfall for Melvin of about $24.7m (£18.3m), according to data from short-selling research firm Breakout Point.
It’s a good reminder that video games are very much a business, and among the variety of factors that doomed Cyberpunk 2077, the demands company executives put on those making the game to satisfy stockholders certainly played a large part. While games are very much an art form, it’s very much a high-stakes business behind making those games, and there’s just as much money to be made when something fails as when it succeeds if you know how to play it. This is what has made the GameStock story so interesting: the people who usually know the market and profit off failures keep getting it wrong in a big way thanks to a bunch of people online simply banding together and acting in unison.
Meanwhile, Elon Musk tweeted about GameStop on Tuesday, causing another surge in price and a lot of excitement online.
Gamestonk!! https://t.co/RZtkDzAewJ
— Elon Musk (@elonmusk) January 26, 2021