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Prominent short hedge funds lost against Reddit day traders, but bubbles always burst

Prominent short hedge funds lost against Reddit day traders, but bubbles always burst

Hedge funds lost almost $5 billion on short bets on GameStop (NYSE: GME) alone, while WallStreetBets day traders army has also been targeting several other highly short squeezed stocks.

Melvin Capital, which started the year around $13 billion in assets and received an emergency cash funding of $2.75 billion from Steven Cohen’s Point 72 and Citadel, closed the position after experiencing massive losses. The hedge fund was down 30% as of today. Several other prominent hedge funds lost billions of dollars against the social media pumped rally.

GameStop stock performance. Finviz chart. See more stocks here.

Steven Cohen’s Point72 plunged 15% since the beginning of this year, while Sundheim’s D1 Capital declined about 20%.  Moreover, short-sellers like Candlestick Capital fell 10 to 15% in January, and Maplelane Capital felt a loss of 33% due to short bets.

Be cautious of a bubble and its burst

Frenzy speculative trading and a massive increase in retail trading volume have turned the stock market into a casino. They have started targeting several other stocks, including Koss Corporation (NYSE: KOSS), AMC Entertainment (NYSE: AMC), Express (NYSE: EXPR), BlackBerry (NYSE: BB), and many more.

Commenting on the internet-fueled speculative rally, one of the best hedge fund manager David Tepper warned investors over the possible bubble, saying it didn’t end well in 1999.

“It was ‘party on dot-com’ in 1999 that screwed the shorts, and now it’s ‘gang up inc.’ it didn’t end well in 1999 when the dot-com bubble popped. Been there, done that. Old scars,” Tepper said.

It appears that the bubble will swell further before busting. GameStop has recovered all the losses it saw in Thursday trading after Robinhood and other broker’s limits trading on highly short squeezed stocks. What’s more, shares of Koss Corporation soared almost 90% in Friday trading while AMC Entertainment stock jumped 64%.

Koss Corporation. Finviz chart.

The social media platform-fueled bubble is potentially unsustainable and likely to burst sooner as the valuations of these stocks are not supporting gigantic gains. The stocks are rallying only because of emotions and targeted high buying of few stocks.

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