White Square Capital has made it official that they are shutting down their main fund and return capital. The London-based hedge fund led by former Paulson & Co trader. Florian Kronawitter was known for betting against meme-stock GameStop back in January during the arbitrage saga. White Square Capital’s closure marks the first for a hedge fund amidst the continuous surge of meme stock trends.
According to Kronawitter, “The decision to close down is related to thinking the equity long-short model is challenged.” A relation to the hedge fund has relayed that the closure was not directly related to the meme stock rallies.
The hedge fund closure follows a business model review and was announced in a letter to investors. According to the letter, White Square Capital had decided on the go-ahead after the withdrawal of funds by two major investors in favor of private equity and cheap passive funds. White Square Capital was set to receive funds in May but opted for closure in response to diminishing returns from the long-short model.
White Square Capital’s letter to investors stated, “The arbitrage opportunities have diminished with both the onslaught of capital caused by central bank monetary interventions, as well as much improved dissemination of information, bringing up the question to what degree the same fees can be justified.”
Meme Stock Ripple Effect
Mass movements of retail investors across online forums like Reddit’s r/WallStreetBets drove up the stocks of meme stocks back in January, putting pressure on hedge fund short sellers like White Square Capital. The chain reaction spread across hedge funds, including Melvin Capital and Light Street Capital, totaling an estimated $12 billion of losses.
However, Melvin Capital run by Gabe Plotkin has since received funding from mentor Steve Cohen and Ken Griffin’s Citadel, which led to a slight rebound.
Meme Stocks Remain Strong
So what’s next for meme stocks? Meme stock leaders like Gamestop, Bath and Beyond, and AMC Entertainment continue to rise in value after a second rally in recent weeks. The Gamestop saga has forced a re-evaluated approach by hedge fund managers, who have begun scouring the internet across social media platforms in search of the next meme stock.
The process has upended the equities market, exhibiting the significant challenge of retail investors against professional investors.
According to Andrew Beer, managing member at investment firm Dynamic Beta Investments, “In two waves, a few hedge funds have seen modestly sized short positions turn into extinction-level events, facing difficult questions from investors as to whether their risk management failed to adapt to a changed market environment.”
Meme Stock Trends Opportunity
GameStop (NYSE: GME) stock recently rose by 12.7% after the company sold 5 million shares, with the received capital scheduled for investment in growth initiatives and corporate purposes. As of the time of this writing, GameStop has accrued 960% in stock since the beginning of the year. Additionally, the company has announced better than expected losses for its first fiscal quarter and officially eliminated its long-term debt.
While White Square Capital’s recent closure may not have direct correlations with GameStop’s rising success, the event marks changing sentiments among investors within a volatile, pandemic-fueled market. Retail trading has nearly doubled since 2020, as Quincy Krosby, chief marketing officer of Prudential Financial puts it, is a part of ongoing democratization of the market, for positions that were once dominated by hedge funds and professional managers.
Based on stock trends, now might be a good time for retail investors to retain a watchful eye over meme-stocks as more social media-driven rallies fuel the equities market. Oil and Gas Producer Torchlight Inc (NASDAQ: TRCH), surged by 74% in a recent rally, similar to GameStop, the company aims to sell $100 million worth of its shares. Meme-Stock leader AMC Entertainment’s (NYSE: AMC) shares have risen by 2,650% since the start of the year, with an 18.3% growth in recent weeks.
