February 2021

Posted by Anton Murray Consulting on . Posted in 2021

Over the last month we’ve been following media coverage of the unprecedented equity market story of GameStop (NYSE: GME), a bricks and mortar video game retailer listed in New York. There are a number of themes at play, too many to cover in a short piece, but we wanted to take a look at what has been happening.

Some hedge funds took the view that GameStop’s retail model is outdated and not viable for the future. They took up short positions over a period of time with the thought that the business would be in steady decline. Then we saw retail activist members of Reddit group WallStreetBets and others join the story. These retail investors came together forcing the price up in a dual attempt to short squeeze the hedge funds who were betting on the stock’s demise, while also looking to make quick dollar gain. The frenzy forced the stock up to historic levels, with increases at one stage of up to 2000%. The hedge funds with short positions were pushed to buy the stock back at higher prices than the borrowed stock they had already sold.

One Australian hedge fund manager reacting from a professional manager’s perspective noted that there was a growing risk in single stock short positions due to social media and retail investors who are fans of particular listed businesses or who wish to act like the WallStreetBets group. This is evident in the speculation that follows Tesla and anything that Elon Musk tweets or mentions on social media.

The retail activists would argue that hedge funds take bets everyday on listed stocks and there is no difference between the actions of either. However, where hedge funds employ professional investor types, retail investors in these forums can be anyone. Some professional day traders, mums and dads, activists and those who wish to get rich quick and follow the latest trend. The recipe for disaster is high. While the worst that can happen to a hedge fund is they go out of business or need a capital injection, retail investors can be left with absolutely nothing. This is particularly true if they have borrowed capital or put their life savings into something on the whim of a Reddit thread. A recent Bloomberg article opined that there was evidence that retail investors were buying and selling GME stock in almost equal measure, debunking notions that the retail frenzy was solely causing the stock price rally. The author also stated, ‘If you’re manipulating GameStop stock, you’re in trouble, but on current evidence I am not all that convinced that anyone is’. The online phenomenon doesn’t look like something that will go away, now that retail investors have seen the impact they can seemingly have on stock prices and on the big hedge fund end of town.

What is right or wrong is hard to say, but the expectation of some form of regulatory response is there. Whether this will alter behaviour or safeguard vulnerable actors remains to be seen, but it seems certain that professional investors will need to take into account the risk that this type of event can and will happen again.

Newsletter Archives

Our clients include

* Prior invoiced clients across the region.