On Twitter and Reddit, questions abounded, from whether Freeman really existed or was acting as a proxy for someone else to how a young, amateur investor could have made so much money on a highly concentrated bet in such a short space of time.
Chief among the questions was how he had raised $US27 million of 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 setting up limited liability companies because of its low taxes and strict privacy rules.
Freeman was no stranger to such doubts. After disclosing his stake in July, he was the subject of a sleuthing campaign on Reddit, where traders tried to find out his identity. “There were conspiracy theories that ranged from I don’t actually exist to I am a front for a Taiwanese amusement park,” he said.
But the response to the news that he had made such a large gain was of a different magnitude. In an email on Friday, declining further interview requests, Freeman said he had been “overwhelmed” by the hurricane of press coverage.
In interviews with Freeman’s classmates, mentors and teachers, a portrait emerges of a precocious young adult unburdened by the normal pressures on his generation, who spent his teenage summers interning at a quantitative investment fund.
There is little doubt that Freeman is who he says he is. Before publishing its story, the FT asked for a copy of his driving licence, which had an address matching the one on his Bed Bath filings. The registrar at USC confirmed that Freeman was in his senior, or final, year, meaning he has skipped a year and is on track to finish his degree early.
‘Not of the typical mould’
What is less clear is how Freeman raised so much start-up capital. He declined to disclose the names of his investors, citing confidentiality agreements, but said he had tapped friends, family and other people in his orbit.
Freeman has 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 trade. The pair have published two academic papers examining complex theories on debt defaults and options contracts. More recently, they studied Latinised Sanskrit together.
“He is not of the typical mould that the schools are conspiring to transform our young children into,” Kapoor said. “Jake is a smart, sharp guy with a dense set of neurons that can address any problem without dogma.”
It was Freeman’s uncle, Scott, who first introduced him to trading. A pharmaceuticals executive who helped found a publicly listed company focused on hallucinogens, he started making investments with his nephew when Jake was 13 years old. Their first wager was worth $US500. Over time, his parents gave him more money. He described their support as “substantial”.
Raised in Summit, New Jersey, a wealthy suburb populated by New York City commuters, Freeman is described by former high school classmates as clever and mature for his age. “He was always really smart and ambitious, even in high school,” said Sabuncu, the friend who signed the presidential filings.
The pair 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 the world championships.
“What I remember about Jake is he was totally optimistic, very confident and willing to go his own way,” said Jeremy Morman, Freeman’s high school physics teacher. After his senior year exams, Freeman took an additional physics class with Morman on relativity. “He just wanted to learn as much as possible from everyone.”
Morman recalls other students peppering Freeman with questions about investing. “If you asked him what is buying on margin, how does this work or what does that mean, he was always very open and happy to talk,” he said.
Search for an ailing retailer
Freeman started assembling the trade that would make him famous this summer following a market rout that had pummelled once-soaring meme stocks such as AMC, GameStop and Bed Bath. The value of these stocks has at times soared thanks to retail traders, many of whom frequent message boards on Reddit, even though the companies have struggled financially.
By bidding the shares higher, these day traders have managed to engineer “short squeezes” on hedge funds that wagered the stock prices would fall. They revelled in the pain felt by professional investors and what they perceived as a rare victory of Main Street over Wall Street.
Freeman believed that the volatility in these stocks – which was evident in the price of options on the shares – could be used as a survival mechanism.
He began to search for an ailing retailer to invest in, where the market had badly underestimated its odds of survival. In June, Freeman bought debts in the pharmacy chain Rite Aid, but the opportunity evaporated when the company announced a tender offer that sent its bonds and stock soaring.
Freeman then turned his attention to Bed Bath, a one-time meme stock favourite that had plummeted in value amid a sales slide and cash crunch that threatened its survival as a going concern. “I noticed how with the right sort of realigning of their debt, they could really reduce their bankruptcy thesis,” Freeman said.
The novel solution he proposed for Bed Bath involved using the high volatility in its stock price to offer bondholders a deal that would lighten its senior debt load from $US1.2 billion to $US500 million. The plan hinged on the company offering stock warrants and convertible notes to debt holders in exchange for reducing the company’s leverage. If the company repaired its balance sheet and the share price recovered, the warrants would go up in value.
The unconventional suggestion was similar to a strategy attempted by rental car agency Hertz in 2020, which tried to issue new shares after filing for bankruptcy, a plan that was thwarted when the US Securities and Exchange Commission blocked the manoeuvre.
On July 20, Freeman disclosed his Bed Bath investment in a securities filing, attached to which was a nine-page letter recommending that the company urgently pursue his proposed debt exchange. Without such action, he believed 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,” Rod Alzmann, a co-founder of the site, said.
Soaring shares
This month, Bed Bath shares started soaring following renewed momentum on Reddit, where moderators of the WallStreetBets channel had lifted a ban on discussing the stock. It catalysed a furious rally in Bed Bath shares that Freeman said caught him off guard. “[People] were really hyping it up on WallStreetBets, which just led to more and more fear of missing out,” he said.
At the start of last week, the shares climbed higher still after Ryan Cohen, the chairman of GameStop and a meme stock figurehead, 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 – derivatives that can deliver a windfall if a stock rises in value.
Freeman decided that the rally had pushed Bed Bath’s shares far beyond their intrinsic value and liquidated his entire stake. His timing was fortunate. The following day, Cohen disclosed plans to also sell his holding of roughly 12 per cent, and the shares plunged. By the end of the week they were worth just $11. Freeman says he has never spoken to Cohen, although he did send him an email once that went unanswered. Cohen declined to comment.
Freeman’s exit from the Bed Bath shareholder register means that his piece of complex financial engineering will go untested. He hit the meme stock jackpot not because of his smart idea, but by following a much simpler investment maxim: buy low, sell high.
“I thought this was going to be a six-months-plus play,” he told the FT last week, adding that the trade had “worked out well for me and the people who trusted me”.
— Financial Times
