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Short Sellers Lose $5.05 Billion in Bet Against GameStop

Short sellers bets against mall retailer GameStop lost $5.05 billion mark-to-market in 2021, according to a note released yesterday by S3 Partners as the stock was up 16% in intraday trading. Up more than 600% since the start of the year thanks to renewed interest from retail investors and short pressesGameStop closed up 93% yesterday and is expected to continue its mind-blowing run higher today.

One of the biggest “victims” of GameStop’s short sellers is Melvin Capital, a hedge fund that started the year with $12.5 billion in assets under management and lost nearly 30% until Friday last week, according to The Wall Street Journal.He announced an emergency injection of $2.75 billion from fellow hedge funds Citadel and Point72 on January 25, and told CNBC today that he closed his short position at GameStop on Tuesday afternoon.

Shares of other Melvin shorts like German drugmaker Evotec, German battery maker Varta and Polish video game company CD Projekt are also rising this week. Traders Reuters spoke to said it was “likely linked to the closure of Melvin Capital following losses at GameStop and other investments.” Meanwhile, Citron Research just revealed he covered the majority of his GameStop short position “in the $90s with a 100% loss”.

It’s about to get complicated, so if you need to go back and brush up on some terms or concepts, be our guest. We do this all the time:

GME: the highest percentage of shorted floats in the world

GameStop’s short-term interest currently stands at $5.51 billion, down from $276 million a year ago, making it the 12th biggest short on US stocks. It is also an extremely crowded short because even if the shorts close their positions and buy, there are others ready to initiate new positions.

The percentage of the GameStop float sold short is 139.57%, the highest level of any stock in the world (with short interest over $100 million) and a completely absurd number. (While some say it could be a sign of bare short circuitS3 analysts say including “synthetic longs” in the free float calculation gives a more accurate picture and that short-term interest is closer to 58%.)

Due to the lack of stock borrowing supply, existing shorts pay a stock borrowing fee of 31% and new shorts pay a fee of over 80%. This high shortage/fee combined with a stock market rally makes it difficult for short sellers to hold their positions profitably and creates a prime short squeeze target. 2021 has brought nothing but bad news for bears in such crowded positions. The 16 stocks with more than 40% of their float sold short at the end of 2020 have risen an average of 96% since the start of the year, according to Bespoke Investment Group.

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