Man, don’t you feel bad for hedge fund managers?
Said no one ever…
Today, a class-action lawsuit was filed against the trading app, Robinhood, in an acceleration of the war currently going on between retail traders and hedge funds. If you haven’t kept up with the news, a group of traders who share corporate due diligence research on a social media forum within Reddit, called wallstreetbets, discovered potential value in shares of the company GameStop Inc, a video game retailer. An interesting piece of the initial due diligence was the fact that the short interest of $GME shares was larger than the float, or available shares to trade, of $GME. The initial investor, who is only known by his Reddit username, opened his position in 2020 and has reported that he has continued to hold both long-dated Call options and shares of GME because he believes the squeeze isn’t over.
In a dramatic fashion, the share price of GME has risen from less than $4 per share to heights of over $400 per share as of the writing of this piece, causing a cascading event of heavily shorted companies to skyrocket in price from a series of gamma squeezes as investors bet that these companies will recover, and with hopes of triggering a short squeeze that will allow them to exit their position at any price they want to take.
We saw the momentum coming into shares of GME and also AMC, and purchased shares at $64 and $2.88 per share respectively on 1/22, and are continuing to hold the position through 1/28.
It is amazing to see retail investors finally able to beat hedge funds at their own game. The main targets of these trades appear to be companies called Melvin Capital, Citron Research, and Citadel Capital, which all run hedge funds with majority “short” positions at all points in time. In the past, these institutions have used dubious tactics and media connections to spread fear, uncertainty, and doubt about various companies. Many of these companies, including Tesla and Palantir, and now, GameStop and AMC, have survived these attacks because investors saw value in the companies. The investors held over time against the short traders, who were trying to drive the company to bankruptcy, and this allowed the companies to create incredible products and technological advances, or at least return to profitability and value creation. These short sellers fought the entire time, usually by issuing reports that cast doubt on a company’s prospects while simultaneously taking large short positions in the stock to scare off investors and cause a cascading selling event, allowing them to take profit from their short positions and then purchase shares at incredibly deflated prices.
In this latest attack on GameStop, these firms united to crush the company even though it was finding new ways to innovate and create value, while reducing expenses and paying the bills. Instead of closing their losing positions, the firms have continued to double down on their shorts, while lying about their positions publicly and claiming they were closed, in order to scare people away from squeezing them out of their position. On the morning of January 28th, 2021, Robinhood, TD Ameritrade, E-Trade, and several other brokers stopped supporting all of the companies that were being squeezed. These also happen to be companies that hedge funds were driving to bankruptcy. Instead of causing a mass amount of panic selling, traders have banded together and decided to hold the shares, not allowing the fear tactics to get to them, and many have vowed to buy even more shares of these companies as soon as they are able to switch brokerage platforms.
It is impossible to know what happens next, but this story seems to be one of a true financial revolution that could fundamentally change how we allow financial markets and the financial services industry to operate. No longer will companies be forced into bankruptcy by hedge funds shorting their shares into a self-perpetuating cycle toward worthlessness. With the likes of Chamath Palihapitiya and Elon Musk commenting on Twitter cryptically about whales stepping into the battle, it is no wonder that we are already seeing a major recovery in shares after hours markets, once the selling pressure from hedge funds apparently doubling down their bets had subsided.
I started The Weekend Trade™ because I was tired of seeing financial institutions take advantage of retail and amateur investors with tactics that are highly unethical at a minimum, and illegal in some cases. Hedge funds and financial institutions have historically cheated and lied to manipulate prices and collude on when to allow equities to run. Now that it seems that the retail traders have learned to be sophisticated enough to beat hedge funds at their own game, the hedge funds are using every tactic they can to cloud the market and scare investors into selling.
Our investment strategy is built on spotting stocks primed to gap over the weekend, with entry based on the settling of options contracts, and exit based on forward-looking performance analysis. We catch swings in stock prices over the weekend based on the — more often than not — greedy market gambling behaviors of the ultra-wealthy.
Join us in the revolution, as we work to rob the big banks (legally, of course).
photo cred: knowyourmeme.com