Hedge funds that bet against GameStop, AMC, etc. have reported several losses, leading to a butterfly effect on the rest of Wall Street.
According to Goldman Sachs, most heavily shorted stocks have nearly tripled in value over the last three months. The gains have discouraged short-sellers from betting on the stock market, setting off negative trends in the stock market.
Heavily shorted stocks with market values above $1 billion rose by 77%
A large amount of heavily shorted stocks like GameStop with market values above $1 billion climbed in value by 77% around April-July of 2020. The current short squeeze past the 56% value for similar stocks around the end of the Great Recession and similar ones during the dot-com bubble.
Goldman Sachs strategists wrote in a note published on Monday that the US equity market has not experienced this type of stock market volatility in the past 25 years of witnessing short squeezes in the stock market.
The recent stock market activity was triggered by traders on Reddit's WallStreetBets page. The traders sent the value of GameStop (GME), AMC (AMC), and other shorted stocks skyrocketing. GameStop lost a quarter of its value, but it's still up nearly 1,200% on the year.
The Reddit group triggered a short squeeze
The Reddit thread named "WallStreetBets" triggered a short squeeze, which made investors that bet against GameStop stock relax their bets and buy the stock back.
This in turn increased the value of GameStop's stock, increasing further the losses experienced by fund managers. Melvin Capital, a hedge fund that bet heavily against GameStop, lost more than 53% of its value in January alone.
Melvin Capital was bailed out by Citadel and Point72, two hedge funds that fundedMelvin'sn capital with $2.75 billion.
The huge financial losses recorded by hedge funds and other wealth management investors are currently affecting the wider stock market on Wall Street. The S&P 500 suffered its worst week since October, a loss that analysts blame on the recent Reddit-fueled activity.