This hedge fund made $700M on GameStop

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Richard Mashaal and Brian Gonick started buying GameStop Corp. shares in September.

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They aren’t Reddit day traders or Discord users. They are hedge-fund managers in New York. And when the stock surged from less than $10 a share to above $400 and the dust had settled, they were sitting on a profit of nearly $700 million, one of the great fortunes of the January market mania.

The GameStop surge is often cast as a triumph of amateurs over professionals. Which it was, to a degree. But it also was a trade that pitted professionals against other professionals — and few have made more money than Senvest Management LLC, Messrs. Mashaal’s and Gonick’s firm.

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“When it started its march, we thought, something’s percolating here,” said Mr. Mashaal, 55 years old. “But we had no idea how crazy this thing was going to get.”

Senvest’s interest in the videogame retailer was piqued by a presentation from the new GameStop chief executive at a consumer investment conference last January.

Ticker Security Last Change Change %
GME GAMESTOP CORP 92.41 +2.41 +2.68%

At the time, most Wall Street analysts had rated the videogame retailer at “hold” or “sell.” The stock also was heavily shorted. Messrs. Mashaal and Gonick would come to know some of the top-returning hedge funds on Wall Street, including Melvin Capital Management, were bearish on the stock from regulatory disclosures.

But as they spoke with management, sussed out competitors and noted the involvement of activists in the stock, including Chewy Inc. co-founder Ryan Cohen, they eventually started buying. By the end of October, Senvest owned more than 5% of the company, paying under $10 a share for the bulk of the stock.

They thought that if GameStop could hold on until the next generation of videogame consoles came out and stoked demand for games and accessories, the company would get a boost. And they reasoned that if Mr. Cohen could help transform GameStop from a largely bricks-and-mortar operation into an online gaming destination, the company could be worth far more.

Messrs. Mashaal and Gonick had been on the wrong end of short squeezes before at Senvest. One case was with opioid maker Insys Therapeutics Inc., though they ultimately made money on their short position. GameStop’s stock could soar if it got caught up in a situation in which its rising price forced bearish investors to start buying back shares to curb their losses, they thought.

“When it started its march, we thought, something’s percolating here. But we had no idea how crazy this thing was going to get.” — Richard Mashaal of Senvest

GameStop is now Senvest’s most profitable investment by dollars earned and by its internal rate of return — a performance metric that takes into account the length of an investment. It has propelled the firm’s flagship stock-picking fund from running $1.6 billion at the end of 2020 to $2.4 billion. For the month of January, the fund returned 38.4% after fees.

The dominant narrative coming out of January so far has been the flipping on its head of the natural pecking order on Wall Street, with hedge funds dealing with sizable losses and individual investors flush with victory after banding together to drive up the price on a handful of stocks once left for dead. But even before this week’s weakening in the rally, the reality was more nuanced.

Mudrick Capital Management LP, a $3 billion-plus New York hedge fund that provided a lifeline to AMC Entertainment Holdings Inc. in December, made almost $200 million largely on AMC in January. The movie-theater chain, which had been fighting off bankruptcy, had been one of the retail crowd’s darlings recently.

Mudrick’s gains come mostly from its holdings in AMC debt, which rallied last week as AMC’s share price soared. The fund also made about $50 million writing and selling call options on AMC and GameStop shares it owned.

PlusTick Management in Charlottesville, Va., which runs a stock- and bond-picking hedge fund that manages about $120 million, gained 20% in January, said an investor. Part of its gains came from existing stakes in companies including BlackBerry Ltd. and beleaguered shopping-center owner Macerich Co. Both companies have been touted on message boards recently.

“You always pinch yourself until the last day of the month as to whether it’s going to hold,” said partner Adrian Keevil.

Other funds jumped into trading in the weekly call options for GameStop and profited in some cases, traders said. Given the volume of stock and options traded in GameStop and other names, they say, individual investors drove only part of the activity.

“It is not just little people on the long side here. There are huge players playing both sides of GameStop,” said Thomas Peterffy, chairman of Interactive Brokers Group Inc.

Senvest Management was founded in 1997 by Mr. Mashaal with an investment from Montreal-based Senvest Capital, his father’s investment firm. Mr. Gonick, his former college roommate, joined as co-chief investment officer in 2008.

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Senvest invests in 25 to 30 companies at a time. The pair describe the fund as a contrarian investor focused on value investing, or the discipline of buying cheap stocks they think will eventually deliver superior returns. They say they actively discourage their team from attending idea dinners and socializing with others in the industry, which they say leads to groupthink and crowded positions.

The main hedge fund has averaged about 18.3% a year for investors through January, according to a person familiar with the fund. It also is highly volatile. It lost 24.1% in 2018, but made 18% the following year, according to an investor document.

Senvest’s approach doesn’t mean they are above speaking with others about investment ideas when it works to their advantage.

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Brian McGough and Jeremy McLean are analysts at Hedgeye Risk Management, a Stamford, Conn., company that sells independent research to institutional and individual investors.

On Dec. 17, when GameStop stock closed at $14.83, the pair announced they were adding GameStop to their long list of “Best Ideas.” The next week, they held an hour-long presentation explaining why they thought the stock could be worth $100.

Unbeknown to Hedgeye’s clients, Senvest had recently pitched GameStop to Hedgeye, laying out its thesis for the stock.

A person familiar with Senvest said Hedgeye made an independent call to recommend GameStop. Still, in doing so, Senvest likely played a role in pushing some individual investors into GameStop.

“I respect Senvest a lot,” said Mr. McGough. “We vetted it independently and we came up with a similar conclusion.” He said it is “not terribly common” to be pitched ideas.

Once the rally in GameStop started, a steady drumbeat of developments made Messrs. Mashaal and Gonick start to think about bailing out of the stock. The two men were glued to their screens tracking the action. They surfed or snowshoed to let off steam.

When Citadel LLC and Point72 Asset Management last Monday invested $2.75 billion into Melvin Capital, which was taking steep losses, Messrs. Mashaal and Gonick suspected Melvin had gotten out of its GameStop position and wondered about how much momentum from shorts covering could be left.

After the market’s close on Jan. 26, Tesla Chief Executive Elon Musk tweeted “GameStonk!!” a rallying cry to users of Reddit’s WallStreetBets forum, who had put their support behind GameStop.

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Senvest, which had slowly been trimming its position, decided to get out completely.

“Given what was going on, it was hard to imagine it getting crazier,” Mr. Mashaal said.

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On Wednesday afternoon, the firm shared the news of its robust GameStop profit with their clients.

Despite the rally’s fade this week, Senvest said the GameStop story will change one part of how they do business: The firm will pay close attention to whether individual investors are discussing a stock on message boards before they bet on or against it.

“I wouldn’t expect that impact to be over,” Mr. Gonick said.

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