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UPDATE 1-The big short: GameStop effect puts global bets worth billions at risk

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    By Thyagaraju Adinarayan and Saikat Chatterjee
    LONDON, Jan 27 (Reuters) - Global bets worth billions of
dollars could be at risk as amateur share traders challenge the
bearish positions of influential funds, inflating stock
valuations and leaving the professionals looking at potentially
hefty losses. 
    Gone are the days when bruised retail investors fled after 
prominent hedge funds bet against a stock -- the GameStop
 effect is rippling across U.S. markets and spreading to
Europe.
    Shares of the 20 small-cap Russell 2000 index companies
 with the biggest bearish bets against them have risen 60%
on average so far this year, easily outperforming the rest of
the market, a Reuters analysis of Refinitiv data shows.
    Similarly, the best performers in Britain this week have 
been companies such as Pearson and Cineworld,
in which investors also have sizeable short positions. 
    But share price surges such as the 700% year-to-date jump in
U.S. video game retailer GameStop could potentially wipe
out billions of dollars of those short bets.
    Bets against GameStop alone amounted to more than $2.2
billion as of Monday, FIS' Analytics data showed, equivalent to
more than a fifth of the company's market value.
    However, the company's share price has quadrupled since the
end of last week and added as much as 86% in early Wednesday
trading to $276.
    "Most of the short positions are funded on margins. And so
when markets run against you, you are stopped out if you are a
short seller," said Kaspar Hense, a fund manager at BlueBay
Asset Management, which runs $60 billion in assets.
    "A short position can exaggerate your losses if you are not
actively managing your position." 
    Several traders have told Reuters that one of the reasons 
for the jump in the price of some shares is short-sellers buying
back into the stock to cover potential losses -- the classic
short-squeeze -- drawing in more retail investors hoping to ride
the wave.
    
    GROWING SHARE
    Retail investors account for an increasingly large share of
market trading. Retail broker eToro told Reuters a third of its
base joined in 2020 when trading on its platform surged
five-fold from 2019 to $1.5 trillion.
    Retail investors' participation in U.S. equity order flows
increased to nearly 20% in 2020 from 15% in 2019, while orders
from long-only funds fell to 6.4% last year from 9.7% in 2019,
data from Swiss bank UBS showed.
    Short sellers typically borrow stocks to sell with a view to
buying them back later when the price falls. The premium they
pay to borrow the shares reflects the demand for them. 
    All the GameStop shares that would be available to borrow
are are already out on loan, with traders estimating annual
borrowing costs at 25%-50% of the company's share price.
    Short-seller Andrew Left, who runs Citron Research and is
one of the big names behind the bets against GameStop, shorted
the stock when it traded around $40, expecting it to halve in
value. He still has a short bet although he has covered the
majority of the position at a 100% loss.
 
    Melvin Capital Management also closed out a short position
against GameStop at a 100% loss.
    GameStop is not the only short bet that has turned sour.
BlackBerry, Bed Bath & Beyond, AMC,
Macy's and Cinemark Holdings, have all risen
anywhere between 100% to 250% so far this year.
    In Europe, Evotec, Nokia and Varta
 have outperformed the wider market 2021.
    Matthew Leibowitz, CEO of digital brokerage Stake said
GameStop's performance is indicative of hedge funds being caught
on the wrong side of a momentum rally.
    While they might have a valid theory in shorting the stock,
the retail frenzy whipping it to record highs will hurt them. 
    "You might have an amazing gun, but its no use if you've run
out of bullets."    

        
    Refinitiv data on performance of some stocks with high short
interest:
 Company            RIC         YTD rise    Short interest
 GameStop                       700%        100%
 AMC Entertainment              400%        100%
 Bed Bath                       110%        62.8%
 BlackBerry                     250%        35.8%
 Dillard's                      100%        82%
 Discovery                      35%         34%
    
               

    
 (Reporting by Thyagaraju Adinarayan and Saikat Chatterjee;
editing by Sujata Rao and Kirsten Donovan)
  
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