“Fundamental shift”: Hedge fund short-sellers suffer big FTSE losses as Reddit GameStop phenomenon hits UK markets

GameStop

Hedge funds have lost some USD325 million betting against FTSE 100 names over the past month, with retail investors driving shorted stocks higher as the GameStop effect reached UK shores.

New data from London-based equity research firm Ortex Analytics shows short sellers lost GBP238 million (USD325 million) in January, which is more than half of the GBP460 million they lost in bets against FTSE 100 names during the whole of last year.

Spurred on by the recent GameStop trading frenzy fuelled by users of online discussion forum Reddit, retail investors seized on several heavily-shorted UK names that make up the UK index – which sent shares soaring and put the squeeze on shorts.

Bearish positions in Pearson Plc – one of the UK benchmark’s most shorted names – dealt the biggest blow to short sellers last month, with losses reaching more than GBP108 million as the company’s stock surged almost 12 per cent in a single day, Ortex said on Wednesday.

Elsewhere, hedge fund managers betting against Ocado suffered a hit of almost GBP76 million, while short positions in BHP Group led to losses of more than GBP57 million. Negative wagers in Hargreaves Lansdown saw short sellers give back GBP52.2 million, and in Sainsburys they were downed by around GBP40 million.

Smaller investors - many from Reddit’s WallStreetBets discussion board - piled into the Texas-based video game store chain GameStop late last month, driving its share price up some 400 per cent, to USD482, at one point. While that triggered big hits to several hedge funds in what was tagged by many as a ‘David-versus-Goliath’ battle, the subsequent collapse in GameStop shares in recent days has left many amateur traders facing huge losses.

Ortex co-founder Peter Hillerberg believes the episode may herald a “fundamental shift” in market functions.

“The story that started with GameStop developed significant momentum throughout January and has impacted trading positions in markets beyond the US,” Hillerberg observed. “Even on the UK’s main market we can see activity in recent weeks to target institutional short positions and force a short squeeze situation.”

He suggested that the information advantage previously held by financial institutions has been “dismantled”, adding that retail investors are now able to build positions that take advantage of historically unseen market inefficiencies.

“This has far reaching consequences for anybody who invests, but particularly for short sellers who, for the first time, find themselves the target of a well-organised and well-informed opponent.

“Whilst the GameStop story may be losing momentum as we enter February, it no doubts points to a fundamental shift in the way markets work.”