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GameStop - El American

The Hedge Fund that Made $700,000,000 by Investing in GameStop

But Senvest didn’t go with expert analysts this time. It talked to management, researched competitors and looked at activist involvement in the stock and ended up buying GameStop’s stock

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The narrative has been, so far, that GameStop’s massive stock buyback was a people’s coup against the big wolves of Wall Street. A rebellion of analysts and small investors organized on a Reddit sub-forum who decided to make fools of the short brokers. And they are somewhat right, but, what they don’t tell, is that there were also hedge funds and big professionals who made a lot of money investing in GameStop.

That’s the case with hedge fund Senvest Management LLC, which hit a bases-loaded home run by investing in GameStop since December, betting that the stock would go up. And it did.

According to The Wall Street Journal, the firm owned by Messrs. Mashaal and Gonick had an interest in GameStop because of a presentation by the video game company’s new chief executive at a consumer investment conference in January 2020.

“At the time, most Wall Street analysts had rated the video game retailer a ‘hold’ or ‘sell.’ The stock was also heavily sold. Messrs. Mashaal and Gonick came to learn from regulatory disclosures that some of Wall Street’s best-performing hedge funds, including Melvin Capital Management, were bearish on the stock,” the Journal explained.

But Senvest didn’t go with expert analysts this time. It talked to management, researched competitors and looked at activist involvement in the stock and ended up buying GameStop’s stock.

“By the end of October, Senvest owned more than 5% of the company, paying less than $10 a share for most of the stock,” the Journal said.

And sure enough, when small investors started buying shares in GameStop en masse in January, encouraged by the media impact on social networks and the push from big billionaires like Elon Musk, coupled with the quick exit of hedge funds betting short, Senvest saw shares it bought at $10 soar to more than $400, earning a favorable balance of $700,000,000.

Why did this hedge fund invest in and trust GameStop?

Senvest didn’t even imagine what could happen to the video game retailer, but they did analyze the company’s situation in detail and determined that they could make a profit by betting on the downside (buying shares).

GameStop, inversionistas, acciones
Hedge fund Senvest also made a significant fortune investing in GameStop shares. (EFE)

“They thought that if GameStop could hold out until the next generation of video game consoles came out stoking demand for games and accessories, the company would get a boost. And they reasoned that if Mr. Cohen could help transform GameStop from a largely brick-and-mortar operation into an online gaming destination, the company could be worth a lot more,” the Journal explained.

As explained earlier in El American, despite many saying that teenagers and small investors on Reddit made the hit, in reality there were plenty of professional and skilled people on that sub-forum to compete with the most experienced people on Wall Street. And those were the ones who made the big bucks,

Just as at the Senvest hedge fund, they realized that GameStop could rise in value in the market, and several analysts were betting on it as well. It was a good bet, then, to go short at the time with the stock at low prices, even though the odds were with short brokers.

Moreover, the hedge fund learned from its mistakes. According to the Journal, “Messrs. Mashaal and Gonick had already been on the wrong side of short-term buying at Senvest. One case was with opioid maker Insys Therapeutics Inc. even though they ultimately made money on their short position. They thought GameStop shares could soar if they were caught in a situation where their rising price forced bearish investors to start buying back shares to stem their losses.”

Now GameStop became Senvest’s most profitable investment by dollars earned and by internal rate of return, and the firm has gone from holding $1.6 billion at the end of 2020 to $2.4 billion. For the month of January, the fund returned 38.4% after fees.

Senvest’s philosophy also helped them make a lot of money. The hedge fund invests in between 25 and 30 companies at a time. Messrs. Mashaal and Gonick “describe the fund as a contrarian investor focused on value investing, i.e., the discipline of buying cheap stocks that they believe will eventually deliver superior returns.”

However, tactical market savvy also worked in their favor, introducing the idea to other potential investors.

That’s how hedge fund Senvest talked to Brian McGough and Jeremy McLean, who are analysts at Hedgeye Risk Management, a Stamford, Connecticut-based firm that sells independent research to institutional and individual investors.

According to The Wall Street Journal, “On December 17th, when GameStop shares closed at $14.83, the two announced they were adding GameStop to their long list of “best ideas.” The following week, they gave an hour-long presentation in which they explained why they thought the stock could be worth $100.”

Subsequently, unbeknownst to Hedgeye’s clients, “Senvest had recently introduced GameStop to Hedgeye, laying out their thesis about the stock.”

A person familiar with Senvest told the Journal “that Hedgeye made a separate call to recommend GameStop. However, in doing so, Senvest likely played a role in pushing some individual investors to GameStop.”

The rest is history, the stock skyrocketed and what was left to do was gauge how far prices could skyrocket in order to get out completely.

And was Senvest the only hedge fund that made money? Not at all.

“Mudrick Capital Management LP, a $3 billion-plus New York hedge fund that provided a lifeline to AMC Entertainment Holdings Inc. in December, made almost $200 million in AMC in January,” according to The Wall Street Journal.

The movie theater chain, which has been embroiled in a battle against bankruptcy, was one of the retail public’s favorite companies.

“Mudrick’s gains came mostly from its AMC debt holdings, which rebounded last week as AMC’s stock price rose. The fund also earned about $50 million by writing and selling call options on AMC and GameStop stock it owned,” the Journal reviewed.

Separately, Charlottesville, Virginia-based PlusTick Management, which runs a stock and bond-picking hedge fund that manages about $120 million, gained 20% in January, one investor told the Journal. “Part of its gains come from existing stakes in companies such as BlackBerry Ltd. and beleaguered mall owner Macerich Co. Both companies have been touted on message boards recently.”

Hedge funds vs. the people?

The problem with analyzing markets with excessive enthusiasm is to leave out the different variants that produce phenomena such as the Reddit users. To say that, simply, what happened was a rebellion is to miss the truth.

Major hedge funds, as well as professional analysts with small budgets, allied themselves with the enthusiasm of the mass of inexperienced small investors that caused a big bubble in GameStop’s stock.

Just as many analysts, small investors and the hedge fund Senvest made a lot of money; there were others who, because they were inexperienced, lost quite a bit. Today GameStop stock is plummeting again, at $67.19, and there were people who bought this stock when it was much more expensive.

There is no doubt that there were losers and winners on both sides, the smartest ones were those who took advantage of the opportunity the market gave them and made fortunes, as in the case of Senvest. At the same time, there are also the small investors who identified the phenomenon in time and did not join the investment fad. Hats of to them.

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