Asleep three hours a night, with no time to eat, a hedge fund manager of Nova York who oversees billions of dollars in assets considers the last week to be the most stressful of his life.
“Nothing was making sense,” he said, observing the actions of the GameStop (GME) fire while he bet they would fall.
Wednesday was the worst day. Powered by conversations on Reddit and others social networks, investors used environments like the Robinhood app to make offers by the retailer.
GameStop went up 135%, on the way to increase more than 1,500% in January, without any change in its business plan. Hedge funds were lost.
Trade in actions it had become so unpredictable at that time in all sectors that the funds were forced to sell stocks that were on the rise to balance their portfolios.
“It’s time to stop,” said the manager to his team.
The experience of the manager and some others interviewed by Reuters in the last few days, everyone asking to remain anonymous for fear of personal threats from retail investors, is a peek through the lock on a week of losses that Wall Street says it was much worse for her than last year’s pandemic sales.
With the start of a new week, it is not yet known how long the recovery fueled by Reddit users will take on actions that traditionally are not coveted.
In the immediate future, it could mean further losses to the market if hedge funds continue to sell to meet redemptions or correct their portfolios. In the long run, they may have to modify their strategies to rediscover the north and turn the tide in their favor.
What is not yet clear is whether this rupture will develop into a market crash, ”said Mohamed El-Erian, chief economic advisor at Allianz.
The extent of the losses exposed a major weakness on Wall Street. Analysis firm S3 said GameStop short sellers had mark-to-market losses of nearly $ 20 billion this year.
Several hedge fund managers have said that the idea of short selling GameStop has long been a favorite at exclusive “idea dinners”, where fund managers exchange ideas about their best deals.
Managers also pointed out that brokers, many of whom work in multi-strategy funds that employ groups of portfolio managers, brokers and analysts, often know each other well and can compare strategies.
Fund managers said the week’s experience is changing the way they do business.
Andrew Left of Citron, who started the retail frenzy by publicly detailing GameStop’s problems, acknowledged the defeat on Friday.
He covered his positions, made a loss and said he will stop publishing short sales reports, a strategy that has earned him millions and made him a prominent name in the industry.
Hedge funds will also be much more cautious about short positions in the future, for fear of becoming an “irrational target,” said a former hedge fund manager, adding that “it kind of defeats the purpose of hedge funds” .
Traditionally, hedge funds have promised investors protection against market crashes, being able to short sell and make money when stocks fall.
Funds are also less likely to use trading strategies, such as put options, a type of derivative that needs to be disclosed and that Melvin and Maplelane used, the managers said.
At the same time, however, one thing will not change: Wall Street is thinking of new ways to make money again.