A group of Wall Street hedge funds are sitting on huge paper profits after a “blank cheque” firm they invested in struck a deal to merge with Donald Trump’s new social media business.
Digital World, a special purpose acquisition company (Spac), began trading in September and was initially valued at just $250m (£181m).
But the firm’s shares have rocketed since it revealed a tie-up with Mr Trump’s new venture, Truth Social, taking its market capitalisation to more than $4bn (£2.9bn) at one stage.
The former US president has vowed his business will “stand up to the tyranny of Big Tech” after he was banned from Twitter for stoking false claims of election rigging.
His announcement sent shares in Digital World surging from around $10 to $45.50 on Thursday and on Friday they leapt even further to highs of $175.
Total raised by special purpose acquisition companies (SPACs)
Shares later shed much of these gains but were still trading above $80 in the afternoon.
It means that early backers of the Spac – which included David Shaw’s DE Shaw – are sitting on paper gains of hundreds of millions of dollars.
A Spac is a listed “blank cheque” fund that takes money from investors and then hunts for promising businesses to take over, meaning shareholders typically do not know what it will eventually target.
The bet on Digital World looks to have paid off handsomely.
DE Shaw, founded by Mr Shaw, a former computer science professor who is worth an estimated $7.5bn (£5.4bn), was sitting on a profit of about $400m at its peak on Friday.
Donald Trump is launching a new social media platform 'TRUTH Social'
Credit: CHRIS DELMAS/AFP via Getty Images
The firm counts Amazon founder Jeff Bezos as one of its former executives and is known for using complicated mathematical models and algorithms to pick stocks.
Highbridge Capital, a fund co-founded by billionaire Glenn Dubin and later sold to JP Morgan, also made as much as $330m.
Other hedge funds set to make profits include Boothbay Fund Management, K2 Principal Fund, Radcliffe Capital Management and Lighthouse Investment Partners.
However, one firm that largely missed out was Saba Capital, founded by Boaz Weinstein.
The fund manager dumped shares in Digital World soon after the deal with Mr Trump was announced – before they shot up.
Mr Weinstein said selling was “the right thing” to do after he learned of the Spac’s new connection to the former president.
Another company linked to Mr Trump’s 2020 re-election effort, Phunware, also jumped higher yesterday, by more than 600pc.
Mr Trump had previously garnered 89 million followers on Twitter, where he posted a stream of outbursts, insults and taunts, sometimes written in capital letters, that often caught both allies and adversaries by surprise.
Critics accused him of spreading disinformation and his profile was temporarily suspended after the presidential election following his claim that rioters who stormed the US Capitol were “patriots”.
$100bn wiped off tech stocks
More than $100bn (£73bn) was wiped off tech stocks on Friday after Snap’s warning about advertising troubles triggered a sharp sell-off in New York.
The owner of Snapchat plunged by almost a quarter, putting the company on track for its biggest one-day slide.
Snap slumped in after-hours trading on Thursday night after revealing that revenues were expected to be significantly lower than analyst forecasts for the final three months of the year at between $1.16bn and $1.2bn. Analysts has been expecting $200m more.
Under its new advertising system, Apple aggregates data and provides it to advertisers three days later, whereas previously advertisers could access real-time information on how their campaigns were performing.
The Snap chief executive, Evan Spiegel, said the changes had come as a "frustrating setback" for the company that generates almost all of its revenue from advertising.
However, he told investors that the company "fully supports" protecting users’ privacy in the longer term.
Snap chief Evan Spiegel
Snap’s finance chief, Derek Andersen, said: "It is still not clear what the longer-term impact of the iOS platform changes may be, and this may not be clear until at least several months or more after the ecosystem stabilises and advertisers are able to fully implement the new solutions we are developing.”
The dreary outlook and fears over similar frustrations at rival advertising-reliant companies dragged other tech stocks lower on Friday, sending Twitter, Facebook and Pinterest down by between 2pc and 5pc.
More than $100bn of market value was wiped off tech stocks on Friday.
Meanwhile, shares in plant-based burger company Beyond Meat sank by more than a tenth after it warned on third quarter revenue.
Beyond had already been expecting sales to fall compared with the previous quarter but said they had slipped faster than it anticipated, partly due to the spread of the Delta variant across the US.
Beyond Meat sells to restaurants as well as supermarkets. Hospitality had accounted for the majority of its sales before Covid but that situation was reversed by the pandemic last year.
The company said it also took a hit from "observed delays in distribution expansion and shelf resets" amid ongoing labour shortages.