Of all the baffling things that have happened over the last six months, few can compete with the short squeeze of GameStop’s stock at the end of January. Over the course of two weeks, the stock price of the video game retailer grew by over 1,500%, putting the short sellers in a massive bind. The price eventually dropped, but the fallout continued, as Financial Times reports that one London-based hedge fund is closing up shop after suffering losses during the stock rally earlier this year that it apparently was unable to recover from.
Sources with knowledge of the situation tell FT that White Square Capital told investors that it will shut down its main fund in June and return capital after reviewing its business model. Sources say the fund managed $440 million in assets at its peak, but having bet against GameStop, ended up suffering double-digit losses during the meme stock explosion at the beginning of the year.
As FT notes, this is one of the first hedge fund closures to reportedly be traced back directly to the meme stock surge that also saw the stock prices of AMC Entertainment, BlackBerry, and others rise exponentially overnight. In addition to White Square, funds such as Melvin Capital and Light Street Capital in the US reported major losses, but managed to stay afloat.
“The decision to close down is related to thinking the equity long-short model is challenged,” said White Square Capital chief investment office Florian Kronawitter. “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.”
While the sources claim that GameStop was the primary culprit behind White Square’s demise, a person close to the fund tells FT that the decision was unrelated. That person added that the fund made back “a fair share” of its losses from January, but the fund is definitively shutting down, so clearly something happened to cause it.
In an investor letter announcing the closure, White Square Capital said that despite a strong performance in 2020, two large investors had decided to withdraw their money from the fund and put it in passive funds or private equity.
“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.”
Meanwhile, GameStop, which was valued at around $18 at the beginning of 2020, is still sitting at $211.50 at the time of writing. The rally may be over, but the stock is still overvalued to an outrageous degree.