Introduction

• On January 20, 2021, the closing price of the GameStop (GME) stock
on the New York Stock Exchange (NYSE) was at $39.12.
• One week later, on January 27, it was at $347.51, representing a
weekly upside of 788%; a nearly unprecedented feat in the history of
stock markets.
• This presentation aims to explain what happened during this week and
the following months.
• The events are centered around one financial concept: the “short
squeeze”.
What are Hedge Funds?
• Definition: Hedge funds are investment
funds that pool capital from accredited
individuals or institutional investors and
invest in a variety of assets, often with
complex portfolio-construction and risk-
management techniques.
• Among these portfolio techniques are
short selling and the use of leverage and
derivative instruments
What is Short Selling?
• Short selling is a financial strategy where an investor profits if the
value of an asset falls.
• The investor borrows the asset from a lender and sells it instantly.
Later, the investor buys the same asset to return it to the lender. If the
price has fallen in the meantime, the investor pockets the difference.
• Cost: Interest payment over time, Reimbursement often in form of
dividend
Understanding the Risks and Rewards
• Risk: Unlike buying securities (being long), where the downside is
limited, short selling can have unlimited downside because the price
has no high limit.
• Reward: The upside of short selling is limited to the value of the asset
at the time of the short sale.
• Margin Call: If the price of the asset rises, the short seller may need to
add collateral. If the initial margin doesn’t cover it, the broker may
issue a “margin call”. Failure to respond will result in the broker
closing the position.
Figure 1: Example of a successful short trade on Tesla
What is a Short Squeeze?
• Definition: A short squeeze can be defined by a lack of supply coupled
with an excess of demand for a stock. It typically occurs when short
sellers have trouble buying the stock to return it to their brokers.
• Example: Unexpected news can cause a jump in a stock’s share price.
Short sellers would find themselves at a loss because they now need to
return a stock at a higher price than they sold it. If their margin did not
cover the bump, their position might be closed by the broker.
The Dynamics of a Short Squeeze
• Buying Back Shares: Short sellers can elect to buy back the shares to
try to cut their losses. This buying alone can already make the price go
even higher than before by increasing the ask price.
• Lack of Liquidity: The main ingredient for a short squeeze is the lack
of liquidity. This would happen if a large number of short sellers need
to cover their positions at the same time. The increased demand will
inevitably increase the price of the security due to insufficient supply.
This dynamic may result in a cascade of purchases and a quick spike
in the price.
Figure 2: Explaining How short squeeze looks like in a stock
Fig: Prices for Volkswagen ranging from January 2008 to mid 2009.
What is GameStop?
• GameStop is an American retailer specializing in electronics and video
games.
• It has been in existence since the 1980s.
• Its performance declined from the mid-2010s due to an increase in
online shopping and digitalization in the video games industry(more
and more people buying a downloadable version of their games,
without a cartridge).
• The COVID-19 pandemic in 2020 further impacted all brick-and-
mortar retailers, including GameStop.
Short Sellers and Hedge Funds on GameStop
• Due to GameStop’s poor financial shape, there was growing interest
from short sellers and hedge funds to bet against it.
• GME’s stock price went from around $45 at the end of 2015 to prices
ranging from $3-5 in mid-2020.
• In April 2020, some attention to GameStop was already present on
Reddit, some users noting the already very high short interest of 84
percent
• In January 2021, GME was the most shorted stock on Wall Street with
approximately 140% of the public float of GME being sold short.
Hopeful Investors and Keith gill’s analysis
• Despite the company’s struggles, some investors were still hopeful for the
prospects of GameStop.
• But the most famous activist in favor of GameStop remains the amateur Keith
Gill, known online as “Roaring Kitty” who believed that GameStop was
undervalued.
• He shared his belief on social media platforms like Reddit and YouTube where
he posted videos and livestreams sharing his daily routine of tracking stocks
and performing investment research.
• For instance, he stated that the financial results of GameStop were not as bad
as what the stock showed, and mentioned that future sales results would be
positive thanks to the arrival of a new generation of game consoles and their
new focus one-commerce.
Fig : Screenshots from Keith Gill’s videos showing that a lot of people still preferred physical copy of the game
Fig 1: Keith’s analysis of the balance sheet Fig 2: Keith’s analysis of income statement and
showing that the company has enough money to various ratios showing that the company is
pay of its liabilities. undervalued