Over the two weeks, the stock of ailing physical video game retailer GameStop’s has been sent soaring thanks to a perfect storm of events: greedy hedge funds, an overzealous community of Reddit day traders, and various cycles of hype fueled by social and news media.
We have a good idea of what got us here. Gamestop investors decided the company was undervalued after it announced huge growth in its e-commerce sales and new board members focused on continuing that growth. On the other side of the aisle: short sellers betting against the company’s stock price. Some, like Citron Research, loudly and confidently declared that buyers were “suckers” who would eat losses once the stock went “back to $20 fast.” Other short sellers like Melvin Capital, a Wall Street prominent hedge fund, simply doubled down on short selling without any sort of, you know, hedge, on their bets.
Redditors on the r/WallStreetBets subreddit, social media traders, and buzz generated from people like Elon Musk and Chamath Palihapitiya have helped pump GameStop’s stock price, even as short sellers have doubled down and loaded up on more short positions. To paraphrase Mark Baum in The Big Short: the short sellers got greedy, they lost track of the market, and Wall Street Bets (and eventually everyone else) decided to profit from their stupidity. As of this writing, Gamestop is well over $340 and the short sellers are in trouble. On Friday, the vast majority of these short selling positions expire and they’ll be forced to buy shares they don’t have at stratospheric prices and eat even greater losses than before.
The dominant narrative of this saga is that it’s essentially a massive wealth transfer from institutional investors and hedge funds to “average” people (who still have enough money to invest in random stocks during a pandemic). This is true, to a degree. People have posted stories of now being able to cover medical bills thanks to GameStop stock, and the original $50,000 investment of the Redditor who started the craze is now worth tens of millions of dollars. Bolstering this narrative is the fact that these folks have absolutely demolished large hedge funds that bet against GameStop, giving it a David vs. Goliath flavor.
But even as the crusade continues, this isn’t a simple story of the little guy winning. The entities that own the majority of GameStop stock are also humongous investment firms and private equity. These entities, such as Fidelity and BlackRock, all own millions of GameStop shares each. Individual day traders spending a few hundred or thousand dollars on GME stock are making a bit of much-needed money, but these institutional funds’ positions are now in the billions.
Take BlackRock, the massive investment fund which seems to own a chunk of every company, including 13.2 percent of Gamestop. BlackRock owned about 9.2 million shares worth about $174 million in December 2020 according to an SEC filing published on Tuesday. That stake is worth about $3.1 billion right now.
But wait, that’s more. As short sellers scramble to cover their position, an investor like Blackrock is in a good position to help with something called securities lending where “mutual funds lend stocks or bonds to generate additional returns for the funds.” If you are a short seller that needs to cover your position, you can always ask BlackRock to borrow some of its GameStop shares, pay them a fee, and offer up collateral equal in value to the market value of the loaned GameStop share.
GameStop’s other big investors are also seeing their positions rise in value. Board member Ryan Cohen—who paid roughly $76 million for his 13 percent—is also sitting on a stake approximately worth $3 billion. There’s also Donald Foss, founder and former chief executive of subprime auto lender Credit Acceptance Corp. He bought 5 percent of Gamestop last February for $12 million, it’s nearly worth $1.2 billion now.
Senvest Management is a New York hedge fund that snapped up 3.6 million shares in October for $43 million, a stake that is now worth north of $1.2 billion. Yet another hedge fund investor, Permit Capital, revealed it had 4.79 percent stake in GameStop in September, then worth $21 million and now worth just over $1 billion. The Vanguard Group, as of July 2020, owned 5.4 million shares or little over 8 percent of Gamestop—worth $21 million then and $1.8 billion now. Vanguard also offers securities lending, by the way.
The same is more or less true for other companies being pumped by WallStreetBets. They may have netted pretty returns on AMC by pumping up the stock, but its major investors are private equity firms, hedge funds, and asset managers like Silver Lake Group, BlackRock, Greenvale Capital, Vanguard Group, and Mittleman Investment Management. WallStreetBets may have wounded a few greedy hedge funds, but it’s also (for now) stuffing the pockets of some while further enriching other shareholders that will lend securities to hedge funds who were stupid enough to double down on shorts or enter the position without any sort of hedge.
GameStop’s current valuation will eventually pop, but even if it shoots down to $20 per share, the firms that own GameStop will still be in a better position than they were while a bunch of retail investors will probably flame out.
At the end of the day, the stock market is still a glorified casino with none of the aesthetic value. That means you can walk out of there with $1 million, $100 million, or $10 billion, but as long as the house is still standing, the house is still winning. And if you look at the investors for these companies, it is very clear the house is still standing.
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