Renowned short-seller Jim Chanos says the GameStop saga has been the most “surreal” episode in his career, and worries that things are going “completely off the rails” with populist politicians looking to capitalise on the situation.
“This was a week even us ancients haven’t seen before,” Mr Chanos said in an interview with the Financial Times. “I have been doing this for 40 years and I don’t remember a period like the past 10 days.”
The remarks by Mr Chanos, the founder of Kynikos Associates, come after a dramatic spell for the US stock market. Shares in companies such as video game retailer GameStop and struggling cinema operator AMC Entertainment rose stratospherically as retail traders laid siege to short-sellers betting against the businesses.
“One of the most surreal aspects is that it has become political and the corollary is they are blaming short-sellers, the guys who got killed,” Mr Chanos said.
The mayhem has captivated Wall Street, as several major hedge funds have been hammered with multibillion-dollar losses inflicted by an amorphous, profane group of day traders loosely organised around a forum on the social media site Reddit, called r/WallStreetBets.
“This week’s Reddit-inspired short squeeze in US equities and deleveraging in global markets is a reminder that social media has not lost its influence on markets simply because Trump left office with a blocked Twitter account,” John Normand, head of cross-asset fundamental strategy at JPMorgan, marvelled in a note to his clients on Friday evening.
Mr Chanos, who rose to fame two decades ago by predicting the downfall of energy giant Enron, said he was particularly shocked by the vitriol aimed at short-sellers — investors that bet shares in companies will fall — given how much they have struggled in recent years.
“This is a euphoric market that has been going from new high to new high,” he said. “Short-sellers have been beat up and left for dead and we’re still blaming them.”
Melvin Capital, a $12.5bn hedge fund run by Gabe Plotkin, was forced to seek a $2.75bn cash injection from larger rivals Citadel and Point72 Asset Management, after losing 30 per cent in the first three weeks of January.
The New York-firm, which disclosed its bet against GameStop in regulatory filings, attracted the ire of retail inventors who took to online forums such as Reddit to drive up shares in companies the firm was betting against.
The narrative quickly morphed from a short-squeeze on Melvin — which proved successful because the short position in the company was huge relative to the share float — and into an anti-establishment movement that has been compared to Occupy Wall Street.
Last week saw a flurry of other hedge funds also ratcheting back shorts and forced to trim long positions, as they battened down the hatches in case the r/WallStreetBets traders targeted their positions. That contributed to the S&P 500 losing 3.3 per cent last week, its biggest weekly loss since the nervy trading that preceded the US presidential election.
But Mr Chanos took umbrage with the idea that GameStop is a political movement about “sticking it to the suits.” He points out that there were a number of hedge funds who had long positions in the company and profited from the rally.
“What has really happened here is a bunch of short sellers and hedge funds have lost a lot of money and a bunch of retail investors as well as a bunch of hedge funds have made a lot of money,” he said.
Mr Chanos also called the political fury and conspiracy theories that erupted after frenzied trading forced online brokerages, who predominantly cater to retail investors, to clamp down on bets in popular stocks “absurd”.
The Kynikos founder said the moves were primarily due to regulations that require brokerages to post collateral for trades their clients conduct to central clearing houses, and the frenzied activity meant many of them struggled to do so.
“We’re seeing a level of misunderstanding about how markets work that is being brought on by a whole new generation of investors who have never seen a bear market and somehow think that they’re being held back from their rightful place at the table by these evil hedge funds,” he said.