Millionaires thanks to the mistakes of Cyberpunk 2077: a mutual fund gets more than 18 million euros after betting against CD Projekt


By CAPosts 07 January, 2021 - 08:00am 1726 views

The crucial bugs in Cyberpunk 2077 - one of the most anticipated video games of 2020 - that caused Sony to remove it from the PlayStation Network, caused the share price of its developer, CD Projekt, to drop more than 38% since its launch in the Bolsa.

Even so, not everything has been bad news for this title. While players and investors had a negative experience, some hedge funds managed to take advantage of these development failures in a big way.

Melvin Capital Management, a New York-based fund, is one of the big beneficiaries of this situation. The failures in Cyberpunk 2077 have drawn severe criticism in the video game industry.

In just three weeks, as reported by Business Insider, the market value of the developer of Cyberpunk 2077 lost more than 18,000 million dollars in the markets . That left many operators in the dry dock. But others, like Melvin Capital Management, managed to make significant returns on their short positions.

© Twitter. An investment fund bet against the success of Cyberpunk 2077 and won.

The company founded in 2014 managed to pocket more than 18.4 million dollars with its bearish bet in CD Projekt - creator of the game - due to the abrupt decline that began to draw in the Warsaw Stock Exchange as of December 4. That was days before the launch to the world of the long-awaited video game.

On September 22, 2020, Melvin Capital Management informed the Polish Financial Supervisory Authority that its short positions in shares of CD Projekt exceeded the equivalent of 0.5% of its share capital

Since then, the size of this investment of the company, which has more than $ 6 billion of total assets under management, has fluctuated sharply. Until October, the company extended its bearish bet, but on December 10 and 11, that is, shortly after the premiere of Cyberpunk 2077, it significantly reduced it.

Speculating down as a reversal tactic

Melvin again went short between December 14 and December 22. In theory, this could be a sign that - according to experts - CD Projekt shares are still overvalued even after the selloff it has suffered so far.

To carry out an operation of this type, an investor, generally a hedge fund such as Melvin Capital Management, must first borrow these shares from another investor; for example, an institutional fund, for which the company receives remuneration. It then sells them in the hope of being able to buy them back at a lower price and return them to the entity from which they borrowed

If successful, the investor's profit will be the result of the difference between the purchase value and the from the sale of the securities.

Thus, short sales are often part of a broader strategy in which the fund manages its investment risk. These positions can counteract "long" bets. That is, those in which the operator 'traditionally' benefits from rising stock prices on the stock market.

However, at least three other large hedge funds tried to profit from the plunge in CD Projekt prices. They may even be more, but in the European Union, reports to regulators of changes in short positions are required only when their value exceeds 0.5% of the company's capital

Not all bearish speculators made money from the failures of Cyberpunk 2077

These bearish speculators, playing against the natural trend, were the US investment firms Eminence Capital and Light Street Capital Management. Both of them probably took positions only in the last few days. This means that they are not yet profiting from their positioning.

Similarly, not all short sellers made money. Marshall Wace, whose company also holds short positions in CD Projekt shares, lost several thousand euros by hastily selling their shares

Said hedge fund first announced that it had taken a short position in October 2018; at the time, the share price did not exceed $ 50. He clearly increased his positions only on December 18 and 22, when the price was slightly below the quote for most of the session. A strategy that did not hit the «timing» .

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Source: MSN