Investment Opps

Robinhood, hedge funds, Reddit, and Gamestop


You may have heard something on the news (or even me speaking with SteveAustin last week[1])about Robinhood, hedge funds, a social media forum (Reddit) and GameStop. You’d probably assume it to be a story where the little guy beats the big end of town hedge funds… unfortunately not.

A very high level overview is GameStop is a traditional bricks and mortar business that sells games in over 10 countries and 5,000 stores worldwide. In Australia, you may have seen EB Games which is a brand they own.

Precovid this company was worth around $400m (market capitalisation). Covid lockdowns hurt many retail businesses, including GameStop which didn’t have an online presence and therefore was competing with Xbox and Nintendo for online game sales as gamers were cooped up at home. A couple of hedge funds chose this stock to short for those reasons, looking to pick up some easy money.

However,a new investor took advantage of GameStop’s presence and joined the board,wanting to turn the retailer into an online gaming version of Amazon. A bunch of millennials on the Reddit forum loved this and decided to invest as well…but also encouraged others to do so. Soon the YOLO (you only live once) trade and inexperience combined with free trades (via the gamified Robinhood trading app) saw this stock price soar. Millennials advertised (via Reddit) their success where $180k was now worth $4m, and more piled in. Meanwhile hedge funds had to close out short positions with losses in the billions. The little guy seemed to be winning…

Last week GameStop was worth more than $24B, and one hedge fund got a lifeline from another (Citadel), which had a very cosy relationship with Robinhood. Essentially Citadel managed to get Robinhood to stop the buying (from its millennial users) in GameStop and only allow sells.The volatility was so wild that GameStop hit a session high of $469 per share before the buy ban was introduced and forced the price to $132. Investors were incensed. Some circumvented the block and used other trading accounts to keep buying… but the damage was done.

[1] See the 2.08 mark

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