Hedge Fund That Bet Against GameStop Shuts Down As Backers Pull Money

Tyler Durden's Photo
by Tyler Durden
Tuesday, Jun 22, 2021 - 09:00 AM

Despite incurring massive losses, Melvin Capital managed to limp away from its brush with GameStop's army of retail traders back in January. While Melvin only survived thanks to an emergency bailout from Mets owner Steve Cohen, the FT reports that one London-based fund may not have been so lucky.

White Square Capital, run by a former Paulson trader, has announced that it will return capital to shareholders. Some of the FT's sources said the decision was likely due to heavy losses stemming from the firm's GME short.

Here's more from the FT:

White Square Capital, run by former Paulson & Co trader Florian Kronawitter, told investors that it would shut its main fund and return capital this month after a review of its business model, according to people familiar with the fund and a letter to investors.

White Square, which at its peak managed about $440m in assets, had bet against GameStop, say people familiar with its positioning, and suffered double-digit per cent losses in January.

While White Square didn't have much public profile, the FT's Laurence Fletcher pointed out that it just might be the first hedge fund to close up shop over its wayward bets against surprisingly resilient meme stocks. GME shares soared from less than $20 in January to a peak of nearly $500/share a few weeks later. And although they've shed roughly half their value since then, they're still well above their lows from early this year. 

Melvin Capital and Light Street Capital (run by Glen Kacher, a former Tiger cub who worked for Julian Robertson's Tiger Management) have suffered serious losses from their meme stock shorts. However, both funds managed to survive the ordeal.

To be sure, at least one source close to White Square told the FT that the decision to shut down wasn't related to the GME short (according to the source, the fund allegedly made back some of those losses). In his letter, Florian Kronawitter, the fund's CEO, said that he is closing down the main fund because of perceived flaws in the "long-short" model.

"The decision to close down is related to thinking the equity long-short model is challenged,” said Kronawitter. "There are way too many fish in the pond with the same strategy of long-short,” he added. "The traditional edge is being arbed away [eroded by other investors], there’s an oversupply of capital."

Despite strong double-digit gains in 2015 and 2016, some of the fund's biggest backers have withdrawn their capital, Kronawitter said.

"We experienced first-hand the shift in trend away from hedge fund investing to cheaper alternatives," it added. According to the letter, White Square had been due to receive investor inflows again in May this year, but instead decided to shut the fund. "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," it said.

Underscoring GME's newfound reputation as a window-making trade, the company's shares surged 11% on Tuesday after the company announced that it had completed yet another equity offering as management follows in the footsteps of AMC by trying to cash in on the retail trading mania. Here's more from Bloomberg. The company completed an offering of 5MM shares for a total of $1.13 billion (an average of $225.20). The offering was managed by Jefferies.

Shares of the video-game retailer rallied as the offering matched the full capacity of GME's ATM authorization. The company says it will use the proceeds from the offering for investing in growth initiatives and maintaining a strong balance sheet.