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Hedge fund Melvin Capital pulls out of GameStop trading

US investment firm suffers huge loss but says bankruptcy speculation is false

A hedge fund at the heart of the GameStop stock surge has withdrawn from the financial battle, closing out its short position at a loss.

CNBC's Andrew Ross Sorkin revealed Melvin Capital has sold all of its shares in GameStop during the network's Squawk Box programme, following a conversation he had with the fund's manager Gabe Plotkin.

The company is credited as the one that shorted GameStop's stock before it was "attacked by an army of investors trying to push up the price."

Sorkin said he did not have an exact figure but described it as a "huge loss." He added Plotkin claims any speculation that the company was filing for bankruptcy is false.

The reporter said the short squeeze had "not been enough to put them out of business but boy, did they come close."

Two other hedge funds, Citadel and Point72, have infused approximately $3 billion into Melvin Capital in an effort to shore up its finances.

The rapid increase in GameStop's share price has been driven by a combination of short-sellers -- those selling borrowed stock with the hopes of seeing the price lower before they're obliged to buy it back -- and online investment communities campaigning to increase that price and the short-sellers losses.

It quickly reached the point where there were more short shares on the market than there were actual outstanding shares of GameStop.

GameStop's share price has risen more than 700% since it opened on Friday at $42.59, closing last night at $347.51 after several days of rollercoaster trading.

After hours trading has since brought the price back down to $292.

"There's nothing normal about what you're seeing with this stock right now," said Sorkin.

The reporter added that these events have raised "real questions about stock manipulation, about the power of what's taking place on places like Reddit" as well as the motivation behind this campaign.

"It clearly has nothing to do with the fundamentals of GameStop itself any more, and much more to do with pop psychology of who's going to be left holding the bag," he said.

"The thing that concerns me most at this point is whether some of these investors will start to get out today. They'll look at this and say 'We won the game,' if that's winning -- it's unclear where the finish line is."

Yesterday, the Biden administration said Treasury Secretary Janet Yellen and her economic team are "monitoring the situation."

Reddit group WallStreetBets has been widely credited as being the heart of the campaign to increase the price.

Overnight, the group has seen its Discord server shut down -- with the platform citing hateful content, not financial fraud as the reason behind this -- and temporarily made its subreddit private after overwhelming interest and activity.

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