New York can’t get rich quick with GameStop

New York state, it seems, has skin in the game when it comes to the recent GameStop trading saga that has taken the world by storm. Fueled by members of the WallStreetBets forum on Reddit, stocks in many beleaguered companies like GameStop, AMC, BlackBerry and others rose dramatically over the past couple weeks – and have since crashed.

The New York State Common Retirement Fund had 496,600 shares of GameStop, according to its most recent quarterly filing with the U.S. Securities and Exchange Commission. The pension fund had reported holding 647,500 shares in a March 2020 asset list. Those 150,900 shares, had the fund held them, would have been worth almost $73 million at the stock’s peak of $483 per share. After the recent drop, they’d be worth around $13.5 million. And reporting from The Journal News showed that the state might’ve sold up to 600,000 shares of GameStop in the past 10 months – a figure that a spokesperson from the state Comptroller’s Office refused to confirm.

The hundreds of thousands of active and retired New York state and local government employees who participate in the fund probably watched the stock price go higher and thought the same thing – sell, sell, sell.

But it turns out it’s not that simple.

A spokesperson at the comptroller’s office said the pension fund doesn’t actually hold shares of GameStop in the same way that most people do when they buy and sell on free trading platforms like Robinhood. Rather, the pension fund owns a portion of GameStop – and many other companies – through index funds, which track a broader market like the S&P 500, for example. If Apple makes up 10% of the value of the Nasdaq, and you buy a Nasdaq index fund, then it’ll be like 10% of your investment is in Apple.

Index funds are typically used by pension funds because the stock market tends to go up at a fairly predictable rate over longer time frames – 10 years, 20 years, 50 years. Plus, if one company does poorly, owning an index fund means the impact of that drop is minimized. When someone invests all their money in GameStop, for example, and that stock’s dips (like it has this week), their bottom line gets hit hard. According to the comptroller’s office, the Common Retirement Fund’s domestic equities are 88% passive, or held in these index funds, and 12% are considered “active” investments where money managers buy and sell individual stocks.

That means those shareholdings aren’t typically influenced by the behavior of an individual stock, even when it comes to one that had such a meteoric rise like GameStop.

The video game retailer had been trading at less than $5 per share over summer, but rose to a high of $483 on Jan. 28 before closing at $90 on Tuesday.

AMC Entertainment Holdings, another stock involved in the market volatility, hasn’t seen its number of shares held by the pension fund change: the Common Retirement Fund held a steady 41,700 shares between March and September. It peaked at $20.36 per share on Jan. 27 and closed at $7.82 on Tuesday.

Bjorn Eraker, a finance professor at the University of Wisconsin-Madison, said those high numbers point to a bubble, not long-term stability of the stock.

“It’s a speculative bubble more than it is a safe investment,” Eraker said. “There’s no way of knowing what they might do because the stock is trading way, way above its fundamentals. It is a game more than it is an investment.”

The reason it’s trading so high – even after the drop – has shocked professionals and regulars alike: Reddit.

Members of the WallStreetBets subreddit had noticed that hedge funds were shorting companies like GameStop and AMC. Short selling is when someone borrows shares – with the promise of returning them to the lender – and then immediately sells them. The short seller hopes the price of the stock goes down so they can buy those shares at a cheaper price and return the original shares to the lender. For instance, a short seller could borrow and sell shares of a stock at $40, and then after the stock drops, buy those shares for $20 and pocket the difference in the share price as profit.

When Redditors noticed these short sellers, they decided to buy up GameStop and AMC shares. The massive number of people flooding into those stocks caused prices to skyrocket. That meant that the hedge funds betting against GameStop had to buy back their borrowed shares at astronomical prices. And when those bets began to sour, the losses were devastating.

What specifically happened to cause all the sharp spikes and drops in the stock prices, though, is a bit of a mystery. While Eraker said it typically boils down to the fundamental question of how many buyers and sellers there are at any given time, the speculative and unprecedented nature of it all meant it was hard to pinpoint a cause.

“It's difficult to see what’s happening. There may not be any justifiable reason for the prices moving as much as they do,” Eraker said. “It is purely a speculative bubble. And we don’t know when that bubble is going to burst or how high it’s going to get.”

For the firms that shorted GameStop, like Melvin Capital, their losses were massive in January.

“The Melvin (Capital) hedge fund has announced that they have to close up. They have no short position so they have to buy to cover, and they took a huge loss on this,” Eraker said.

But if you’re a firm with money, Eraker added, you can actually try and short the stock right now: borrow shares of GameStop, sell them while they’re peaking, and then buy them back when the craze has died down and prices plummet.

Eraker stressed that eventually bubbles “pop,” and those who are left with the shares at the end of the line will have likely lost the most money. Already, people who invested last week are down big. Betting that you’re not one of those people is risky.

He said: “This is a dangerous game.”