How a 20-year-old college student made $110 million riding the meme stock wave

At the age of 18, Jake Freeman ran for President of the United States, collecting signatures, forming a campaign committee, and registering his candidacy with the Federal Election Commission.

“He wanted to be the youngest on the ballot,” said Eray Sabuncu, a friend who attended the same suburban New Jersey high school and signed in the 2020 election. deposit as treasurer. “I didn’t know then that he was going to be famous.”

Predictably, the presidential bid went nowhere, but Freeman, now 20, became one of the youngest investors to generate a nine-figure windfall by trading the frenzy actions themselves. Last week, the Financial Times reported that the University of Southern California applied math and economics major had crystallized a $110 million gain after selling shares of struggling retailer Bed Bath&Beyond

On Tuesday, Freeman sold his more than 6% stake in the retailer, which operates cavernous stores filled with homewares and gadgets, for about $27 a share. He had amassed it a few weeks earlier when the stock was trading below $5.50.

“I originally expected it could go to $8 or $9 a share,” Freeman told the FT on Wednesday as he waited for the shuttle from the Los Angeles airport to the college campus. “I was really shocked that it went up so fast.”

After building up his stake in July, Freeman penned a letter to the company’s directors suggesting they use a complex financial strategy that would capitalize on the retailer’s status as a meme stock to raise cash and more than halve its existing debt.

“I can leverage the math side to make games based on statistics,” he said.

The FT’s report on Freeman’s windfall on Wednesday sparked a media storm, with media around the world picking up the story as social media sites lit up with the news. But the story of a college student who won the same stock jackpot has also been met with widespread skepticism.

On Twitter and Reddit, questions abounded, whether it was whether Freeman really existed or was acting as a proxy for someone else or how a young amateur investor could have made so much money on a highly concentrated bet. in so little time.

The main question was how he raised $27 million in capital in the first place through a vehicle registered in the cowboy town of Sheridan, Wyoming, a state that has become a magnet for people creating limited liability companies due to its low taxes and strict confidentiality rules.

Freeman was no stranger to such doubts. After disclosing his involvement in July, he became the subject of a sleuthing campaign on Reddit, where marketers tried to uncover his identity. “There were conspiracy theories ranging from I don’t actually exist to I’m the front of a Taiwanese amusement park,” he said.

But the response to the news that he had made such a big win was of a different magnitude. In an email Friday, declining further interview requests, Freeman said he had been “overwhelmed” by the hurricane of media coverage.

In interviews with Freeman’s classmates, mentors and teachers, a portrait emerges of a precocious young adult, relieved of the normal pressures on his generation, who spent his teenage summers interning at an investment fund. quantitative investment.

There is no doubt that Freeman is who he claims to be. Before publishing his story, the FT requested a copy of his driver’s license, the address of which matched that of his Bed Bath documents. The USC Registrar has confirmed that Freeman is in his senior or senior year, which means he skipped a year and is on track to graduate early.

Bed Bath & Beyond operates cavernous stores filled with homewares and gadgets © Mark Kauzlarich/Bloomberg

What’s less clear is how Freeman raised so much seed capital. He declined to release the names of his investors, citing confidentiality agreements, but said he bugged friends, family and others in his orbit.

Freeman interned at New Jersey-based Volaris Capital Management under the mentorship of its founder Vivek Kapoor, who said he was not involved in the Bed Bath business. The duo has published two academic papers examining complex theories on defaults and options contracts. More recently, they studied Latinized Sanskrit together.

“He’s not from the typical mold in which schools conspire to transform our young children,” Kapoor said. “Jake is a smart, sharp guy with a dense set of neurons who can solve any problem without dogma.”

It was Freeman’s uncle, Scott, who introduced him to trading. A pharmaceutical executive who helped found a publicly traded company focused on hallucinogens, he began investing with his nephew when Jake was 13. Their first bet was worth $500. Over time, his parents gave him more money which he described as “substantial”.

Raised in Summit, New Jersey, a wealthy suburb populated by New York commuters, Freeman is described by former classmates as smart and mature for his age. “He was always very smart and ambitious, even in high school,” said Sabuncu, the friend who signed the presidential documents.

The duo were part of a team that won an entrepreneurship competition in 2020 for a project that used plant enzymes to break down plastics in household waste. Freeman was also in a local robotics club that went to world championships.

“What I remember of Jake is that he was totally optimistic, very confident and ready to go his own way,” said Jeremy Morman, a physics teacher at Freeman’s high school. After his final year exams, Freeman took an extra physics course with Morman on relativity. “He just wanted to learn as much as possible from everyone.”

Morman remembers other students asking Freeman about investing. “If you ask him what margin buying is, how it works, or what it means, he was always very open and happy to talk,” he said.

Freeman began assembling the trade that would make him famous this summer following a market rout that hit stocks of once-booming memes like AMC, GameStop and Bed Bath. The value of these stocks has sometimes skyrocketed thanks to retail traders, many of whom frequent message boards on Reddit even as the companies struggle financially.

By bidding on stocks, these day traders managed to create “short pressures” on hedge funds that were betting that stock prices would fall. They reveled in the pain professional investors felt and what they perceived as a rare victory for Main Street over Wall Street.

Freeman believed that the volatility of these stocks – which was evident in the price of stock options – could be used as a survival mechanism.

He began looking for a struggling retailer to invest in, where the market had grossly underestimated his chances of survival. In June, Freeman bought debt in drugstore chain Rite Aid, but the opportunity evaporated when the company announced a takeover bid that sent its bonds and stock soaring.

Freeman then turned to Bed Bath, a former meme stock favorite whose value had plummeted amid a slump in sales and a cash crunch that threatened its survival as a going concern. “I noticed that with the right kind of realignment of their debt, they could really reduce their bankruptcy thesis,” Freeman said.

The new solution he proposed for Bed Bath was to use the high volatility in its share price to offer bondholders a deal that would reduce its senior debt from $1.2 billion to $500 million. The plan was based on the company offering equity warrants and convertible notes to debt holders in exchange for reducing the company’s indebtedness. If the company repaired its balance sheet and the stock price recovered, the value of the warrants would increase.

The unconventional suggestion was similar to a strategy attempted by rental car agency Hertz in 2020, which attempted to issue new shares after filing for bankruptcy, a plan that was thwarted when the Securities and Exchange Commission United States blocked the maneuver.

On July 20, Freeman disclosed his investment in Bed Bath in a securities filing, which was attached with a nine-page letter recommending that the company urgently proceed with its debt swap plan. Without such action, he believed that Bed Bath would soon go bankrupt.

Freeman then began discussing his investment on Twitter, Reddit and a site called GMEdd.com. “He wanted to articulate his plan to retail investors,” said Rod Alzmann, co-founder of the site.

In August, shares of Bed Bath began to soar following renewed momentum on Reddit, where moderators at the WallStreetBets channel had lifted a ban on discussing the stock. This catalyzed a furious rally in Bed Bath stocks that Freeman said caught him off guard. “[People] were really hyping up WallStreetBets, which led to growing fears that we were missing something,” he said.

Early last week, shares soared further after Ryan Cohen, the chairman of GameStop and a leading figure in the meme stock, filed documents with the SEC on Monday detailing a previous purchase in February and March of a large number of call options in Bed Bath – derivative products that can generate a windfall if the value of a stock increases.

Freeman decided that the rally had pushed Bed Bath shares well beyond their intrinsic value and liquidated his entire stake. His timing was fortuitous. The next day, Cohen revealed plans to sell his roughly 12% stake as well, and shares plunged. At the end of the week, they were only worth $11. Freeman says he never spoke to Cohen, although he emailed him once with no response. Cohen declined to comment.

Freeman’s exit from Bed Bath’s shareholder register means his complex financial engineering will go untested. He hit the jackpot on the same stock not because of his clever idea, but by following a much simpler investing maxim: buy low, sell high.

“I thought it was going to be a game over six months,” he told the FT last week, adding that the swap had “worked out well for me and the people who trusted me.”

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