GameStop, a mall-based video game store suffering from both reduced foot traffic and the growth of online games during the pandemic, was seeing its stock decline due to these natural market conditions. Wants to Tunnel under Miamiīut one thing that hedge funds didn't hedge against in the GameStop case are thousands of small traders on Reddit who had noticed a number of stocks being shorted by hedge funds that had been essentially preying on troubled companies during a recession. If the short works out as planned, the hedge funds profit, but when it doesn't and the price of the stock goes up for some reason, the damage to the fund can be colossal.Įlon Musk's Boring Co. This can drive the market price of the stock down, and at that point the hedge funds would buy the stock back for less money, keeping the difference minus any fees paid to those who they've borrowed it from. The premise of shorting by hedge funds essentially involves the funds betting on a stock dropping in price in the long term, and making money by borrowing shares of stock for a fee and then selling these shares to buyers who could pay a lower price.
GameStop had been trading at a fairly low price and was expected to drop further. In a nutshell, the GameStop short squeeze began when retail traders in a subreddit-not investment bankers but just people bored of the coronavirus lockdowns-got fed up with a hedge fund that was shorting GameStop stock. And at its core, it's not dissimilar with what Porsche had done a decade prior with Volkswagen stock.
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