The manager of 2021’s top-performing hedge fund on his winning

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On this day last year, investors watched in amazement as GameStop shares surged to a record high of $347.51. The stock had skyrocketed amid a trading frenzy brought on by retail investors swapping stock tips — and related memes — on social media. 

Professional investors also got in on the action but not all of them were on the short side of the trade. GameStop became Senvest Management’s single best trade of all time, notching $700 million in profit for the firm. Those gains contributed to Senvest’s more than 85% returns last year, making it the top performing hedge fund of 2021. 

Senvest Founder & CEO Richard Mashaal sat down with CNBC’s Delivering Alpha newsletter to discuss how he navigated his firm’s position in GameStop and shared lessons he learned along the way. 

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: You had been invested in GameStop for months prior to the frenzy that we saw in January 2021. Did you know what would happen?

Richard Mashaal: Surely we didn’t know what would happen but you know, we did get in in September. So that was September [2020], so well before the stock caught fire, and it’s a classic contrarian play for us. There’s one word that’s synonymous with Senvest: it’s contrarian. That’s what we look for — things that are really out of favor that have the potential to come back into favor. And we saw that kind of setup there.

Picker: You were looking at the short interest as well, which I think was similar to some of the back and forth that we saw over the Reddit forums with the retail investors. How do you kind of look at those things when making a decision to invest in a company that has been out of favor? And kind of figuring out what catalysts could make it return to favor?

Mashaal: There’s a couple of really easy indicators. So how many sells and buy recommendations. Wall Street doesn’t issue very many sell recommendations and GameStop had plenty of those and very few, if not, no, buy recommendations. So that’s a starting point. And then, of course, the short interest, which was over 100% of the shares outstanding, which is certainly the first time in my career — our fund’s going on 25 years so it’s quite a long time — that I’ve ever seen anything like that. So both of those would be pretty glaring indicators that this was a stock that was out of favor. Actually the high short interest concerned us a little bit, in a way, because that also meant it was a battleground stock and we don’t usually like to get involved in a battleground stock and, boy, this really turned out to be a big battle. 

So that’s the negative side of it, but the positive side is, we saw management who had been there for over a year come in and do a hell of a lot of cost cutting, really reacted to the inability to operate their stores normally because of the pandemic and really push their foot to the pedal on e-commerce….