It turns out that hedge fund manager Michael Burry did not cash in on the rapid rise in the GameStop share price.
It was generally assumed he would coin it as Burry had bought shares in the US-based computer game retail chain before its share price shot from $3.47 a year ago to as high as $347.51 on January 27 after several other hedge funds were caught in a ‘short squeeze’.
The squeeze was famously engineered by small-time investors through a Reddit internet forum, who bought up as many shares as they could. The plan was to hold onto them and have the hedge funds become forced buyers because these funds had ‘borrowed’ shares as part of a scheme to make money from an expected slide in the price.
The price did not slide – it actually rose – and in order to return the shares they borrowed, the funds were prepared to any pay any price to ‘return’ them.
With hedge funds desperately looking for GameStop shares, Burry was thought to be well-placed to profit as he was holding a few million of them
If Burry, who had bought three million shares for $16.56 million through his hedge fund Scion Asset Management in August 2019, had sold these shares at its height, he would have made $270 million.
Not to be
This did not happen because it turns out that he did not have any shares to sell, as he sold all of them before the short squeeze trap was sprung in mid-January 2021.
According to Scion Asset Management’s Security Exchange Commission (SEC) fourth quarter filings released on February 16, the hedge fund had disposed of all its holdings in GameStop by December 31, 2020.
The rally started on January 12 when the shares were trading at around $20. Over the next two days, the price doubled to about $40, and then just 10 trading days after the rally began it peaked at $347.51. The share price slid to $53 on February 4, and has been trading at around $40 for the past week.
Burry did make some money
Even so, judging by usual investment criteria, Scion actually did well.
In its third quarter filing, the fund had shown that it had already made some money from GameStop. Although it had reduced its holdings from its initial three million shares to 1.7 million, the value of this holding had actual risen from $16.56 million to R17.3 million by the end of September 2020.
This effectively meant the value of its hold had effectively more than doubled, despite a reduction in the size of its holdings.
Between the end of September and the end of the year – the period Scion sold the rest of its holding – GameStop’s share price rose from $10.20 to $18.84.
Burry clearly made some good money on GameStop but it still in no way compared to the $800 million Scion made from buying mortgage-backed insurance just before the 2008 financial crisis.
Nevertheless, the disposing of his holdings before the rally might explain why Burry was so reticent about the goings-on at GameStop.
In a since-deleted tweet he said: “If I put $GME [GameStop] on your radar, and you did well, I’m genuinely happy for you. However, what is going on now – there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous.”
But Burry did not just delete this tweet, he deleted all his tweets.
This weekend he surprised by once again returning to Twitter. This time he warned that there is a possible bubble in the stock market (which is trading at close to record highs) and that those he calls “gamblers” had taken too much margin debt – money loaned by stockbrokers to buy or short stocks.
To prove his point, he posted a chart from Advisor Perspectives, which showed that there was a correlation between how margin debt and the S&P 500 have synchronised in their rate of contraction over the past 20 years.
Advisor Perspectives was hesitant to draw conclusions on the data. It said there were “too few peak/trough episodes in this overlay series to take the latest credit balance data” to see it as “a leading indicator of a major selloff in US equities”.
Burry, however, thinks the danger is clear.
“At this point the market is dancing on a knife’s edge.”