A London-based hedge fund that bet against the GameStop retail investors has become one of the first casualties in the internet populist revolt against Wall Street elites.
White Square Capital, which at its height managed some $440 million (£314.58m) in assets, has reportedly shut down after reviewing its business model.
According to a report from the Financial Times, the hedge fund had bet against GameStop by taking out short positions against the stock, a process in which big money bets that the company will fail and their stock will crash.
However, White Square reportedly suffered double-digit losses in January on the position after the Reddit forum WallStreetBets launched a coordinated effort to buy the shorted GameStop stock in order to trap hedge funds into heavy losses.
The so-called meme stock investors were able to drive the price of GameStop stock from just over $17 (£12.15) per share to over $347 (£248.09) at its peak in January. The move sent shockwaves through the financial establishment, with the leading financial trading app Robinhood taking the extraordinary action of shutting down the ability of small investors to buy the stock.
The January 28 move from Robinhood, which outraged individual investors, was also questioned by Senator Elizabeth Warren, who noted a potential conflict of interest between Citadel LLC’s hedge fund and the company’s securities division, Citadel Securities, a market maker that handles Robinhood order flow and appears to account for substantial Robinhood revenue. On January 25 Citadel LLC and its partners had invested $2 billion in emergency funds to stabilize Melvin Capital Management, a hedge fund that hemorrhaged billions due to short bets against GameStop. Both Citadel LLC and Robinhood have denied that the decision to shut down GameStop trading had anything to do with their financial relationship.
In a letter to investors, White Square said: “We experienced first-hand the shift in trend away from hedge fund investing to cheaper alternatives.”
“The arbitrage opportunities have diminished with both the onslaught of capital caused by central bank monetary interventions, as well as much improved dissemination of information, bringing up the question to what degree the same fees can be justified,” the letter added.
Former Paulson & Co trader Florian Kronawitter, who ran White Square, said: “The decision to close down is related to thinking the equity long-short model is challenged.”
“There are way too many fish in the pond with the same strategy of long-short. The traditional edge is being arbed away [eroded by other investors], there’s an oversupply of capital,” Kronawitter added.
A source close to the hedge fund cited in the report tried to downplay the idea that the GameStop revolution was directly to blame for the firm’s closure, however, saying that the fund was able to recoup a “fair share” of its initial losses on their short position.
In January, one of the leader’s of the global populist movement, Brexit’s Nigel Farage said that the GameStop revolution is the successor to the Trump and Brexit movements.
Mr Farage said that the greed of Wall Street elites, dating back to the 2008 financial crisis, was the reason “why we voted Brexit and it’s why in 2016 Trump got elected and got another 75 million votes in November, and now this populist action has moved from voting to what people do on the markets”.
The Brexit leader said that the globalist establishment should be worried as “they haven’t just got the Trumpites screaming, they’ve got the Trumpites now linked up with those on the left, both with common cause about the way that big money, big banks, big politics work together in their favour and against ordinary folk”.
Editor’s Note 26/06/21: This story has been corrected to differentiate between the Citadel hedge fund and the company’s securities division. It also has been updated to include Citadel and Robinhood denials about motive for shutting down GameStop trading on January 28, 2021.
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