Did Michael Burry see GameStop scenario coming? Hedge fund honcho made bold play amid Covid-19 pandemic

Burry's play reportedly sparked one of the most out-of-control trades in financial history, resulting in billions of dollars in paper profits for some investors, including few amateur speculators


                            Did Michael Burry see GameStop scenario coming? Hedge fund honcho made bold play amid Covid-19 pandemic
Christian Bale as Michael Bury (right) in The Big Short
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Dr Michael Burry, the hedge fund honcho who minted millions during the 2008 crisis by shorting subprime mortgages, arguably made a bold play amid the coronavirus pandemic. But did the physician-turned-investor see the GameStop squeeze coming from a mile away? Burry's hedge fund Scion Asset Management spent nearly $15 million to purchase 5.3% of ailing video game retailer GameStop at between $2 and $4.2 a share. According to Forbes, Burry's play was to convince GameStop to use its cash to buy back stock – thereby retiring about half of its shares outstanding.

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Burry, who was dramatized by Christian Bale in "The Big Short", called for GameStop to exhaust its $300 million buyback authorization in a sharply worded letter to its board of directors. The company's entire market cap at the time of his letter was just $300 million. Burry's play reportedly sparked one of the most out-of-control trades in financial history, resulting in billions of dollars in paper profits for some investors – including quite a few amateur speculators. In turn, this caused billions in losses for some of the world's biggest hedge funds.

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Michael Burry attends the premiere of "The Big Short" at Ziegfeld Theatre on November 23, 2015, in New York City. (Getty Images)

When Burry was building his position this spring, GameStop was merely at $2.57 a share. As of early Wednesday afternoon, the share's value had rocketed to over $365 – after a group of amateur speculators on Reddit worked to corner GameStop’s heavily shorted stock, Forbes reported.

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The unprecedented surge in GameStop shares resulted in a squeeze reminiscent of German car-giant Volkswagen's during the depths of the 2008 crisis, when it rose to a half-trillion-dollar market cap and resulted in about $30 billion in realized hedge fund losses.

GameStop, at the urging of investors like Burry, has bought back about $200 million in stock since 2019 – thereby lowering its shares outstanding by 38%. "The repurchases, combined with massive hedge fund bets against GameStop as it suffers from declining in-store video game sales, meant it ended 2020 as one of the world’s most heavily shorted stocks," Forbes' Antoine Gara explained.

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People pass a GameStop store in lower Manhattan on September 16, 2019, in New York City. (Getty Images)

Burry, who arguably instigated the current circumstances with his massive buyback push, is now calling the squeeze "unnatural, insane, and dangerous." “If I put $GME on your radar, and you did well, I’m genuinely happy for you,” Burry tweeted on Tuesday. “However, what is going on now – there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous.” It appears he later took down the tweet.

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This is perhaps an attempt by Burry to mitigate the fiasco that he unleashed. Or, as Gara noted, Burry may be "suffering from a bit of FOMO, or fear of missing out," considering the 3.4 million shares Burry originally purchased for about $15 million would be worth over $1 billion at the going rates.

Securities filings reviewed by Forbes revealed that Burry had sold his GameStop long before the circus began. He owned just 1.7 million shares as of September 30 and likely kept selling as the hard-hit electronics retailer ripped into year-end, according to the business magazine. 

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