A Legion of Reddit Forens Loses Billions to Bearish Wall Street Funds

Moving the market has always been considered the privilege of a select group of large investors capable of shelling out millions in a matter of seconds.

But the coordinated action of thousands of members of the popular Reddit forum is throwing that maxim to the ground, in an unprecedented move designed to make quick money while striking out on Wall Street's most speculative and reckless side: the bear funds they raise. profit when a business goes under.

GameStop is the unlikely epicenter of that battle.

As was the case with the video store sector, the Texas-based company had been completely misplaced in a 21st century where users no longer need to go to physical stores to purchase video games, their source of business, and prefer to choose to download them.

This is how the market interpreted it, with its shares plummeting from $ 55 in 2013 to $ 2.57 in April last year.

Few thought that trend was reversible.

One of them was Ryan Cohen, a young investor with a solved life since he sold Chewy in 2017, the so-called

for pets he founded, for $ 3.35 billion.

Cohen then decided to invest that money in two well-established companies: Apple and the Wells Fargo bank, but also in getting a significant package in the decaying GameStop, to which he promised to give new life.

The stock rebounded due to its breakthrough in the firm, but its results continued to be disappointing.

And hedge funds like Melvin Capital and Citron Research launched themselves at the company's neck, investing large amounts in bearish positions, that is: the more GameStop stocks fell, the more money they would make.

The strategy did not have one factor: the army of more than two million small investors grouped in the Reddit forum Wallstreetbets (Gambling on Wall Street).

Their purchases have led to a meteoric advance of GameStop of over 700% so far this year.

This Tuesday it practically doubled in value, and this Wednesday it has doubled it again, exceeding 300 dollars and 20,000 million dollars of market capitalization in the midst of frenzied trading levels.

The bullish stampede has caused several bearish Wall Street funds to lose billions of dollars in a few hours, including Melvin Capital, which had started the year with $ 12.5 billion under management and is down 30% so far this year. .

Crushed by the pressure of losses, this same Monday three funds came to the rescue of Melvin Capital by injecting $ 2.75 billion into the firm in exchange for a percentage of the company.

S3 Partners estimates that the bears have lost a total of about $ 5 billion.

Although his investment is not based on objective criteria about the economic situation of the company, the foreros have celebrated his power to face the giants of Wall Street as a feat.

The messages on the platform calling to invest in GameStop and mocking and insulting the bears have proliferated like wildfire, mixed with others of euphoria at the benefits obtained: “My initial investment of 800 dollars is now worth around 13,000.

Let's go ”, says the message from one of the users, written entirely in capital letters and accompanied by several rocket emoticons.

Others, applying in GameStock more complex and riskier instruments to multiply their money, even boast of much higher profits, transforming 50,000 dollars into 23 million.

The party seems to have no end.

And the richest man in the world is contributing to it, the founder of Tesla, Elon Musk, who has shared with the more than 43 million followers of his Twitter account the link to the Reddit forum at the origin of the challenge to the markets .

Some analysts have already come out to warn that things could end badly.

There are bearish investors who will end up with millionaire losses, but since the rise in the GameStop stock is not related to news that suggests that the company will make more money or perform better, and is simply due to organized manipulation, other bearish funds are taking the relay betting on the next collapse of the stock once the irrational

unleashed by small investors

ends

, and sources cited by the Financial Times even open the door to an investigation by the SEC, the US stock market regulator.

The case bears some resemblance to what happened in 2008 with Volkswagen shares, when a crash in bearish positions triggered the vehicle manufacturer's share to shoot more than 200% in a single session.

However, the popular component of the GameStock case, powered from below by investors with time to watch the market, money to risk, and the urge to thrill, has its own idiosyncrasies.

Other businesses like the AMC theater chain and the blackberry phone company, also in the doldrums, are seeing similar but less pronounced upswing, encouraged by Reddit's army of investors who call themselves

An organized bubble that as always happens on Wall Street will make some people earn a lot of money and others lose it.

Ryan Cohen, the 30-year-old who got rich off pet products, is clearly in the top today.