AMC Bet by Hedge Fund Reveals Thanks to Meme Equity Traders
A multi-faceted bet on AMC Entertainment Holdings Inc.
boomeranged this month on Mudrick Capital Management LP, the latest hedge fund to fall victim to the swarming of day traders.
Mudrick’s flagship fund lost around 10% in just a few days, as a rise in AMC’s stock price unexpectedly triggered changes in the value of derivatives held as part of a complex trading strategy, they reported. declared people familiar with the matter.
The setback comes months after a group of traders organizing on social media helped send the price of GameStop Corp.
and other stocks soared in January, well beyond what many investors think of underlying fundamentals.
This development has prompted many hedge funds to reduce their exposure to stocks themselves. Mudrick Capital’s losses underscore how risky it can be to maintain significant exposure to such companies, or even backfire on a hedge fund manager who was for the most part in tune with the optimism of individual investors.
Jason Mudrick, the founder of the company, has been trading AMC stocks, options and bonds for months, riding a resurgence of enthusiasm for the theater chain among individual investors. But he also sold call options, derivative contracts intended to hedge the fund’s exposure to AMC in the event of a fall in the share price. These derivative contracts, which gave its buyers the right to buy AMC shares from Mudrick at around $ 40 in the future, turned into liabilities when a resurgence of Reddit-fueled buying recently pushed AMC shares. to new records, people said.
As part of AMC’s broader strategy, executives at Mudrick Capital were in talks with AMC to buy additional shares in the company in late May. On June 1, AMC revealed that Mudrick Capital had agreed to buy $ 230.5 million in new shares directly from the company at $ 27.12 apiece, a premium to where they were trading at the time. .
Mudrick immediately sold the stock at a profit, a quick turnaround that was reported by Bloomberg News and sparked backlash on social media.
“Mudrick didn’t stab AMC in the back… They shot themselves in the foot,” read an article on Reddit’s Wall Street Bets forum on June 1. Other posts around this time referred to Mudrick as “losers,” “garbage bags” and “a big pile of rippling shit with no future. Forum members urged each other to buy and hold.
Inside Mudrick, leaders grew increasingly concerned as the AMC rally gathered momentum. The Enterprise Risk Committee met on the evening of June 1 after the stock closed at $ 32 and decided to exit all debt and derivative positions the next day.
It was a day too late.
The AMC stock price broke above $ 40 within hours on June 2, hitting an intraday high of $ 72.62. Call option prices skyrocketed amid a trading frenzy to which Mudrick Capital contributed and by the end of the week the winning trade had turned into a slump costing the fund hundreds. millions of dollars in losses.
Mr Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC shares at the start of the year and held onto them gained around 2,000%.
The impact of social media-fueled day traders has become a defining market development this year, costing major hedge funds billions of dollars in losses, triggering a congressional hearing and attracting the attention of the Securities and Exchange Commission of United States. More hedge funds are now tracking individual investor sentiment on social media and paying more attention to companies with smaller market values whose stock prices may be more responsive to individual investor enthusiasms.
Mr. Mudrick specializes in investing in distressed debt, often lending to distressed companies at high interest rates or swapping their existing debt for equity in bankruptcy court. Mudrick manages approximately $ 3.5 billion in company-wide investments and owns large and illiquid stakes in electronic cigarette maker NJOY Holdings Inc. and satellite communications company Globalstar Inc.
such exchanges. The flagship fund posted returns of around 17% per year from 2018 to 2020, according to data from the HSBC Alternative Investment Group.
But struggling investment opportunities became harder to find, as the Federal Reserve’s easy money gave struggling companies open access to debt markets. Mr. Mudrick explored other strategies, launching several specialist acquisition companies and, in AMC’s case, ultimately buying shares in block trades.
Mr. Mudrick initially applied his typical playbook to AMC, buying bonds for as little as 20 cents on the dollar, loaning the company $ 100 million in December, and trading some bonds for new stocks. Already under pressure, theater attendance had almost entirely disappeared amid pandemic Covid-19 lockdowns, and AMC stock was trading at just $ 2. He estimated that consumers would regain their appetites for big-screen entertainment this year as more Americans get vaccinated.
Day traders made their first run at AMC in late January, cheering each other on with the social media rallying cry of #SaveAMC and briefly bringing the stock to around $ 20. The rising value of AMC shares pushed up the prices of debt – a bond held by Mudrick Capital doubled in a week – quickly rewarding Mr Mudrick’s optimism. AMC took advantage of soaring share prices to raise nearly $ 1 billion in new funding at the end of January, which saved it from a previously expected bankruptcy filing.
Around this time, Mr. Mudrick sold call options on AMC shares, generating immediate income to offset potential losses if the movie chain ran into trouble. Derivatives gave buyers the opportunity to buy AMC shares of Mudrick Capital for around $ 40, which is considered an apparent improbability when the stock trades below $ 10.
Mr. Mudrick has kept in touch with AMC CEO Adam Aron regarding the provision of additional funding, which led to his recent share purchase. But he kept the outstanding derivative contracts as an insurance policy, said one of those familiar with the matter.
—Alexander Gladstone and Soma Biswas contributed to this article.
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