A big hedge fund’s complicated mix of bets on shares of AMC Entertainment has reportedly backfired, spurring a loss that tanked its value by 10 percent.
Mudrick Capital – which made a tidy profit earlier this month for purchasing $230.5 million in AMC shares then selling the entire stake just hours later, saying the stock was “overvalued” – took the painful loss because of a series of bets it had also made against the company, according to a Wall Street Journal report.
Before Mudrick bought into AMC, the fund hedged the purchase with a number of call options — a type of derivative that gave Mudrick a “short” position in AMC stock. But after Mudrick sold the 8.5 million shares, it failed to exit its short position, according to the Journal, which cited unnamed sources.
As AMC shares closed the day 23 percent higher despite news of Mudrick’s sale, the fund’s risk committee met and decided they would liquidate the entire short position the next day, according to the Journal.
But Mudrick didn’t close out quickly enough. On June 2, impassioned day traders pushed AMC shares 127 percent higher in a single day, costing the fund hundreds of millions of dollars.
Mudrick Capital is still up 12 percent this year despite the recent loss, but their gains pale in comparison to AMC’s 2,000-percent increase this year.
Mudrick isn’t the first hedge fund to be trounced for their short position by retail investors push stock higher on Reddit’s WallStreetBets forum. In January, amateur traders sent GameStop shares to record high levels crushing funds like Melvin Capital which had significant short positions.
Still, the movie theater exhibitor faces massive debt and declining interest in movie going. And even as the Reddit army has buoyed the price over the last few months, sources note that day traders aren’t as reliable as institutional investors and could decide to sell as quickly as they decided to buy into the company.
People close to Mudrick have previously told The Post they’re cynical of AMC’s business model — and that they come from a different world than Redditors — “one that values business based on fundamentals,” a source told The Post.