Dan Sundheim’s GameStop Short Pain Prepared Him for 2025 Turmoil

(Bloomberg) -- The GameStop Corp. short squeeze that cost Dan Sundheim’s firm $4 billion in a single month in 2021 left him in a state of shock, so he was prepared when market turmoil in March again spurred hedge funds to unwind bets.

The stock book at Sundheim’s D1 Capital Partners is up 28% this year through November, according to a person familiar with the matter, who asked not to be identified because the numbers are confidential.

In a letter to investors, Sundheim explained how the firm positioned itself ahead of the hedge fund industry’s largest unwinding of exposure since 2021. That year retail investors notoriously squeezed hedge funds that had shorted GameStop and other meme stocks like AMC Entertainment Holdings Inc. and BlackBerry Ltd.

“In our earlier years, these conditions — US and tech underperformance, hedge fund de-grossing, crowded stock unwinds, and retailed-oriented short squeezes — would have likely resulted in much more volatile results for our public portfolio,” Sundheim wrote in the September investor letter. “But we were better prepared this time.” 

The firm — which manages $25 billion — started the year with its highest-ever net exposure to non-US companies, the letter said. As investors grew restive in March and April amid US tariffs and war in the Middle East, it concentrated on bets with long-term potential.

D1 was also well-positioned in July, when individual traders drove up the stock prices of highly shorted companies, including residential real estate firm Opendoor Technologies Inc. and retailer Kohl’s Corp. D1 avoided getting hit, as it had already diversified its short book, boosted risk monitoring and curbed its exposure to those kinds of plays, Sundheim wrote.

“This enabled us to maintain our positioning even as a squeeze played out over the subsequent months,” he wrote.

D1’s stock-picking portfolio had already advanced 23% this year through August, beating many of its peers. The long book trounced the MSCI World Index by 20% for that period, while its short book outperformed the index by 7% before fees, according to the letter.

D1 called its five-biggest stock winners transformational bets, meaning they’re undergoing changes in management or products or benefiting from an emerging trend such as artificial intelligence. Those include Siemens Energy AG, Hanwha Aerospace Co., Rolls-Royce Holdings Plc, AppLovin Corp. and Philip Morris International Inc. 

Four of the equity book’s five-biggest losers were its short bets. 

Sundheim, an AI bull, expects the technology to foster an ideal stock-picking environment. To date, D1 believes AI has had a substantial affect on only a small number of public stocks — and primarily on the long side.

“We anticipate that the short opportunities will be even more plentiful,” he wrote.

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