A Morgan Stanley mutual fund that bet on GameStop recorded the best performance of any of its peers in January, showing how some Wall Street firms managed to play the retail trading surge to their benefit.

The now $1.5bn Morgan Stanley Institutional Inception fund rose more than 30 per cent in January on a total return basis, boosted by a 1,625 per cent gain on its holdings of GameStop stock. That left it at the top of Morningstar’s ranking table for US equity funds.

Its strong performance starkly contrasts with several other fund managers who were wrongfooted by the surge in GameStop shares, triggered by a community of day traders who congregated on Reddit’s r/WallStreetBets discussion board. The hedge fund Melvin Capital, for instance, posted a 53 per cent drop for January that prompted an emergency investment from Point72 Asset Management and Citadel.

The Morgan Stanley fund, run by Dennis Lynch, first disclosed holdings of 346,943 Gamestop shares last September, around the same time it was revealed that Ryan Cohen, co-founder of online petshop Chewy, had also bought into the game retailer.

The shares had a market value of just over $3.5m at the time, and the fund had just over $400m in total assets, according to Morningstar. The fund’s GameStop holding grew to more than $112m at the end of January, helping to contribute to a more than 100 per cent return for the fund since September.

Morgan Stanley Investment Management declined to comment on its holdings and whether it had reduced the size of its position in GameStop. The fund’s net asset value has risen about 2 per cent this week as of Tuesday’s close even as GameStop shares have plunged 72 per cent, FactSet data show.

The fund aims to seek out small companies with high growth potential and has made big bets on some beneficiaries of the pandemic, propelling it to total returns of about 150 per cent in 2020. It has made bets on online clothing store Stitch Fix, software company Fastly and online retailer Overstock.com, whose shares are all up in excess of 20 per cent this year.

Speaking on an online talk hosted by Goldman Sachs last year, Mr Lynch said the pandemic had accelerated existing trends such as the growth of ecommerce. 

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“The volatility we saw during the March, April, May timeframe was just unbelievable,” he said. “We have been through things like that before and what it can do is change the opportunity set dramatically in a short window.”

One of the biggest disclosed holdings of GameStop stock sits with Fidelity’s Series Intrinsic Opportunities fund, which held almost 10 per cent of the outstanding shares in October, according to regulatory filings. Those shares, equivalent to $71m at the time, would have been worth more than $2bn at the end of January.

However, the fund’s recent performance suggests Fidelity sold at least some of the shares before the Gamestop rally intensified: the fund returned just 3.9 per cent in January.

Gamestop alone would have contributed a gain of more than 15 per cent in net asset value, according to FT analysis of the October filings, while other holdings did not have large enough moves to offset any such gains. 

Fidelity said it did not discuss individual positions. “To protect our fund shareholders, we do not disclose intent for any potential buy or sell decisions,” said a spokesperson.

In a blog post on Fidelity’s website this week, investment director Tom Stevenson warned against the speculative frenzy that led to GameStop’s share price skyrocketing, describing it as a “dangerous beast”.

“Getting rich slowly by studying the fundamentals, being well-diversified, saving regularly and avoiding the siren call of the internet message boards sounds dull,” he wrote.

“Compared to waving your anti-Wall Street flag on the Reddit barricade, it probably is. But it’s nothing like as boring as not being able to retire because what looked too good to be true actually was.”