Robinhood is a smartphone-friendly investment platform founded by Silicon Valley entrepreneurs Vladimir Tenev and Baiju Bhatt in 2013. Robinhood co-founder and co-CEO Baiju Bhatt on stage during a conference in San Francisco in 2018. Online campaigns against short sellers are nothing new but this latest Reddit-fuelled frenzy has sent shivers down the spine of institutional investors, many of whom called for regulators to step in and prevent this from happening again. “Traditional” investors, meanwhile, exhibited a mix of outrage and shock. They are distinct from more traditional managed funds.īut hedge funds actually typically get the money for these bets from superannuation funds and their overseas equivalent pension funds which are looking to diversify their portfolios.Īs you can imagine, landing such a blow on mega-rich institutions was met with glee from the retail trading army. Hedge funds are typically private investment vehicles that make risky bets using techniques such as short selling, or by using financial derivatives and other sophisticated trading strategies. Hedge fund managers are often billionaires. Credit:Getty Images And what is a hedge fund? That is when short sellers rush to close out their positions at the same time, causing a huge upward spike in the share price. So they were hurt badly when GameStop’s share price defied the odds to rise instead of fall, creating a huge “short squeeze”. In the case of GameStop, US hedge funds Melvin Capital and Citron Research were notorious for their “short” positions in the company, and were betting on it decreasing in value during a tough time for physical retailers. While many people view them as a necessary part of financial markets – they have historically helped expose fraudulent behaviour and also provide liquidity – some short sellers have been accused of manipulating markets and ambushing companies. Short sellers have long been considered controversial, including in Australia. They return them to the banker, pocketing the $600 profit (less the fee paid to borrow them). The short seller buys the shares back for $600 less than what they sold them for. They sell the on-loan shares for $1000, hoping the price will fall after they do so.Ĭompany A’s share price does indeed drop amid pessimism around the company, with the $1000 parcel of shares now worth only $400. They then return the shares to their owner, pocketing the difference.įor example: A short seller borrows $1000 worth of shares in Company A from a banker. If all goes according to plan, the company’s share price will drop and the short seller will buy back the on-loan shares at a cheaper price. They then quickly sell these shares back on the market. Short selling is a common – but controversial – strategy where investors bet on a company’s share price falling.Ī short seller usually pays a fee to borrow shares in a company from a long-term shareholder that they consider to be overvalued, or due for a drop. “GameStop: power to the players”: a GameStop store in Pennsylvania. The beaten-down games retailer has become something of a moral symbol that has galvanised retail investors and evoked echoes of the Occupy Wall Street movement.Įssentially, Redditors are taking what they consider a righteous stand against the investment establishment and short-selling US hedge funds. Shares in the company rose more than 1000 per cent to a peak of $US483 ($629) as a community of online share traders – organised via the Reddit forum r/wallstreetbets – piled into the stock.įor these at-home traders – whose approach is often considered “less sophisticated” by institutional investors – buying up GameStop shares hasn’t necessarily just been about making money. They were worth about $US3 in April and by mid-December had hit $US16. Like many brick-and-mortar retailers, GameStop has struggled through the coronavirus pandemic, especially as consumers can download games direct to their consoles these days instead of purchasing a physical disc or cartridge.īut against the odds, GameStop shares have surged.
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