By
Steve Muchoki
April 25th, 2024
Despite the losses sustained by Melvin Capital amidst the GameStop bet going bad, the company still has very high liquidity.
Popular hedge fund Melvin Capital Management closed the first month of the year with a 53% loss amid its bet gone wrong on the shares of GameStop Corp (NYSE: GME) and other stocks. As reported by CNBC, Melvin Capital was one of the major hedge funds targeted by the Reddit board r/wallstreetbets, with the sole aim of creating a short squeeze in the hedge fund’s position on the stock.
The push by the Redditors worked as GameStop shares closed the previous week with a 400% gain to $325 per share. GameStop (GME) has soared by more than 1,625% this year, a massive growth for a stock trading at about $10 per share at the start of the fourth quarter last year.
The drama between Melvin Capital as well as other hedge funds and the retail investors on Reddit was sparked when the latter group turned to the chat board to discuss stocks whom the Wall Street money bags have placed a short bet on in order to turn the tables around. Besides GameStop, the Redditors also helped push up the price of AMC Entertainment, Bed, Beth, and Buy amongst others. In appreciation of its mission, the r/wallstreetbets chatroom has seen a growth in its membership to 7 million from 2 million.
Melvin Capital reportedly closed down its short position in GameStop back on Tuesday last week amid skyrocketing losses.
Melvin Capital was Rescued with Investors Funding
Despite the losses sustained by Melvin Capital amidst the GameStop bet going bad, the company still has very high liquidity marked by an $8 billion Asset Under Management (AUM) down from about $12.5 billion at the beginning of the year.
The current liquidity was boosted by new funds injected by Citadel and Point72 to the tune of about $3 billion according to CNBC, citing sources familiar with the matter. Per the source, in complement to the firm’s healthy liquidity, its use of leverage is at its lowest levels since it was launched back in 2014.
The continuous embrace of GameStop shares as well as the others by retail investors through trading has been halted by some brokerage platforms including Robinhood. The move which enraged many investors has been justified by the brokerage firm in a blog post that the central Wall Street clearinghouse mandated a tenfold increase in the firm’s deposit requirements on the week in order to ensure smooth settlement in trades involving the securities experiencing unprecedented volatility.
While Melvin Capital’s losses have been counted, the SEC has been called upon to investigate the appearance of market manipulation in the GameStop saga in the past month.
“We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules,” Sen. Elizabeth Warren, D-Mass., told CNBC Wednesday. “To have a healthy stock market, you’ve got to have a cop on the beat.”
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