Last Monday, Nate Koppikar, portfolio manager of hedge fund Orso Partners, woke up at 4 in the morning to check his home Bloomberg terminal. His computer had flagged that GameStop shares would open much higher than normal on the stock market, but he didn’t make much of it. Although Koppikar wasn’t betting for or against GameStop, he knew how much other Wall Street hedge funds were cheering for the company’s
demise. It was one of the most heavily shorted, or bet against, stocks out there, which meant it was subject to crazier moves — like a long-shot horse winning the Kentucky Derby makes for a bigger payday than the odds-on favorite. There were new PlayStation and XBox consoles, after all, and GameStop had added a new board member — more than enough reason for the share price to rise.
The week that followed was anything like what he could have predicted. “It is hell, man. It’s hell,” he told me from his home office in San Francisco. Koppikar, 33, is a short seller — the kind of investor demonized by the hordes of Reddit day traders who sent GameStop soaring more than 1,000 percent from a few months before. He makes money by researching companies he believes are frauds, or at least aren’t telling the whole truth in their public documents, and then making bets that their shares will fall once they’re found out. The job is one of the loneliest on Wall Street, openly reviled by CEOs such as Elon Musk, and has become harder as shares have largely refused to go down after more than a decade. And last week, Koppikar, like pretty much every other Wall Street investor, was wondering if he’d be next. “It’s speculation for sport,” he said.
When the markets opened Monday, GameStop was already the talk of the financial press. The company’s shares started the week at $96.73, after closing on Friday at $65.01. By then, Koppikar realized that GameStop’s rise was not some garden-variety move in the market. Soon, the stock was whipping around violently, jumping up to an unheard of $159.18 and then crashing back below where it closed on Friday. The rest of the market started to crater as hedge funds had to sell off some of their other stocks in order to cover money-losing positions. “Extreme dread definitely started setting in when it was becoming clear that it was market-wide, and it wasn’t just GameStop,” he said.
Koppikar said he’d been following r/WallStreetBets for years, and knew that thousands of investors had been talking up the video-game retailer in defiance of the so-called smart money, the old guard of investors who saw the company as another Blockbuster — stuck in a past that’s been increasingly outdated by the internet. It didn’t take long for Melvin Capital to get outed in the financial press as one of the funds facing deep losses for being on the wrong side of the bet. Although Orso didn’t have a position on GameStop, he knew he needed to get as far away from whatever Melvin was invested in — now.
“My first reaction, as I see what’s happening to their shorts, is what do they own?” he said.
Koppikar pulled their latest report on their holdings, which are filed every quarter with the Securities and Exchange Commission. Even though his investments didn’t overlap with Melvin’s, he had to worry that other hedge funds who had some of the same investments could go under — and then drag Orso down with it. “You start to go down this game of like, how much does my book look like everyone else’s book?” he said. His phone was ringing off the hook with trading partners calling. The question was whether to buy more, sell off their positions, or hold on and try to ride out the rise in volatility.
For any short seller, there are huge risks to being on the wrong end of a deal. The process involves borrowing shares from a middleman, immediately selling them into the market for cash, and then agreeing to buy them back at some future date. They make money when the stock goes down and can pocket the difference.
But if the shares go up, there are problems. “You just don’t know how high the stocks can go,” he said. Potential losses for a short seller are infinite, whereas traditional investors can largely only lose whatever money they’ve put in. Koppikar not only shorted with investors’ money, but he also was risking his own funds — meaning he could stand to lose his shirt, too.
Melvin Capital was the case in point. The hedge fund ended up getting a nearly $3 billion bailout by big-time investors Steve Cohen’s Point72 and Ken Griffin’s Citadel by the end of that day.
“They got blown up and there wasn’t anything nefarious or illegal they were doing. They were just stupid. They shorted a stock that was over-shorted,” he said.
Koppikar won’t say what his positions are, or whether they overlapped with Melvin, but he decided to stay the course.
“Real short sellers who do this and take it seriously, they can withstand extreme amounts of pain because we are wrong on 98 percent of days,” he said. “When we’re right on those 2 percent of days, there is panic, and there is an extreme move that is emotional, and there are people capitulating because they all believed in something that turned out not to be true.”
GameStop continued its rise during the next two days, going to nearly $500 a share. By the end of the week, WallStreetBets had targeted other companies, like AMC Theaters, that were muddling along, sending their share values skyrocketing.
“On Tuesday, it’s becoming clear that the consensus trade of being short retail and cheap stocks is getting blown out,” he said. His dread, he said, peaked on Wednesday when Federal Reserve Chair Jerome Powell played down the craziness in the markets. “This is scary, because he is not taking it seriously,” he said.
He’s found himself in another position that few on Wall Street are willing to say out loud: The redditors got it right.
“From what I can gather is that redditors are pissed off that hedge-fund managers make tons of money, and they’ve come to believe that they don’t do anything special. And the truth is they don’t do anything special. I agree with Reddit,” Koppikar said. Hedge funds that just buy shares of big tech companies like Amazon, he went on, “have generally been bad for capital markets. They create an unfair, uneven playing field, and I would support not just more regulation on them, but extensive, heavy-handed regulation on them, because what you’re seeing in markets is stoking the wealth inequality that we have in the country.”
Koppikar believes that the GameStop saga exposed a deeper flaw on Wall Street that has let hedge-fund managers make piles of money by investing in money-losing companies while choking off capital for solid but past-their-prime retailers.
“They are just buying tech stocks and using lots of borrowed money to do it. And that is not special and you shouldn’t pay them high fees for that,” he said. “Is that good for society that people who are already wealthy have found ways to get even wealthier using the stock market while creating no jobs, creating no value?”
Since then, he has watched politicians like Senator Elizabeth Warren’s call for more oversight of Wall Street, and even Saturday Night Live lampooned the casino-like atmosphere of the stock market.
“What happened with GameStop, as silly as it sounds, is what is going to force accountability again,” he said. “It got so crazy that it drew the attention of the whole country and then people actually started looking at the stock market.”
