Business & Investment

GameStop Traders May Have Hedge Funds Change Investment Tactics

Small investors outperformed smart money, and the war between Reddit traders and hedge funds seems to have marked Wall Street indelible.

Large investors or hedge funds holding short positions in individual equities have seen some of these positions besieged by a large cohort of small investors. Many use the Reddit forums.

The idea of ​​a short is that when the stock price goes down, the position holder makes money, but when the stock price goes up, the investor has to buy the stock himself, and in all its activities the stock price goes up even higher. A short circuit will occur. squeeze. GameStop Is the poster child of the deal, which reached $ 483 on Wednesday when investors bought covered stocks and shorts. It rose 400% last week alone and closed at $ 325 on Friday after a week of volatile trading.

Inventories reversed after a mid-week peak. Its highs were more than halved by Thursday afternoon, closing at $ 193.60, down 44%, and hurt investors who wanted or were kicked out at higher levels. However, it resumed its rise on Friday.

Leo Grohowski, CIO of BNY Mellon Wealth Management, said hedge funds caused turmoil on Wall Street 30 years ago, but are now confused.

“There’s a lot of what’s happening. I don’t think it’s a one-time distortion,” he said.

Rich Repetto, Senior Research Analyst at Piper Sandler, said investors’ movements in social media forums and online trading are similar to Covid’s impact on the workplace when employees work from home. The trade phenomenon began during a pandemic and accelerated as people were trapped in their homes. Like working from home, many eventually revert to the old routine, but some changes are permanent.

“We are doing different things now. Will the trade rise as well?” Repetto said. “It may not be, but we will never return to 2019. There is a whole new generation introduced to the market through the app.”

There were also some implications on Wall Street. Citron Research, one of them On Friday, we announced that we would no longer publish research on short positions., Finish 20 years of practice.

GameStop isn’t the only investor favorite on the WallStreetBetsReddit forum. Investors are buying dozens of short names, including: Blackberry, Nokia And Kos.. AMC Entertainment is another thing: it fell 50% on Thursday, but rose 54% to $ 13.26 on Friday.Missing stocks fell on Thursday Robin Hood, Interactive Brokers, etc. restricted trading and raised margin GameStop, AMC and other significantly shortened name requirements.

The securities company liquidates the transaction through the clearinghouse. Clearinghouses can look for more capital behind rapid trading from small investors. Brokers with insufficient capital can face significant losses if investors are suddenly wiped out.

Robin Hood CEO Vladimir Tenev told CNBC that he had restricted trading of 13 shares on Wednesday as part of an internal investment risk management decision made to protect the company and its investors. He said the decision was based in part on the SEC’s net capital rules and clearinghouse deposits that brokers must comply with.

Temporary movement by Brokers offended investors and garnered criticism from lawmakers Congressman Alexandria Casio Ortez, DN.Y. From the distant wings of both parties, including a rare agreement between them. Texas Republican Senator Ted Cruz. Robin Hood raised $ 1 billion overnight from investors, in addition to $ 500 million accessed via credit lines to trade stocks like GameStop. Mr Tenev said the move was aggressive and not due to liquidity issues.

“This is an unprecedented activity focused on a few names, and it’s really the first time I’ve seen this intersection of social media and financial services.” Tenev spoke at CNBC Thursday night.

Some market pros also hope the event will shed new light on short-term trading, long-term Wall Street strategies, but critics say which companies have lost their businesses to Covid. I’m pointing out how I aimed.

Billions of shares have been traded as a result of this week’s frenzied trading, and stock market dynamics could change. Market pros say hedge funds may be cautious about wearing shorts and instead may open a position in the options market, which acts as shorts.

For retail investors, retail growth surged during the pandemic, causing it to grow to about 20% of the market from the early teens. Free trading offered by Robin Hood and other online brokerage firms has helped this trend, as well as the stock market, which has risen virtually straight since its March lows.

“The overall 40,000-foot view is that this is opening up retailers. Retailers, whether sustainable or not, are driving valuations of certain stocks. Retail at some level. I think the increase in activity will continue in the future. “

Repetto said this trend should benefit online brokers such as Hood, TD Ameritrade and Schwab. The impact on hedge funds is still unknown.

“There is no doubt that in the last few days we have had hedge funds do a little risk assessment and look at short positions to see if there are any stocks with high short positions that could be affected by social media.” Repetto said.

However, the phenomenon of a large number of small traders working together can change the market. Dan Deming, managing director of KKM Financial, said small investors were able to discover market inefficiencies and move them together.

“Some of the long-term strategies that have worked for a long time are currently being challenged, at least in the short term,” Deming said. He hopes hedge funds will replace some strategies with options trading.

“To some extent, it tells you that market demographics continue to evolve, and again it’s a combination of technology that meets your needs and finding a home within the investment community,” Deming said. “Market participants feel a little more daring to get in and out of positions than they used to. Information is in a much more equal competitive arena. Investors feel like they are traders to some extent.”

Steve Massocca, managing director of Wedbush, said Reddit investors came across what was a winning strategy and realized that some of the names they were investing in were good stocks.

“I thought Tootsie Roll was a ridiculously cheap and well-run company. Some of these names were very undervalued,” he said. “It’s not GameStop, but the Reddit guys chased where there was a big short position where they were buying stocks that they thought were of great value. Tanger Factory Outlet He was badly punished because of Covid, but the business isn’t really bad. “

Mr Massocca said a quantitative analysis of his company two years ago showed that betting on shorts was a wrong deal. It wasn’t great a year ago, but he noticed that things have changed in the last six months or so.He bought short B & G Foods, Green Giant, Accent, Ortega, and sold when approaching mid- $ 30. Thursday was down 8.6% to $ 37.51.

Short-term pressure on hedge funds sold long positions on Wednesday, causing the market to fall sharply. However, it bounced off Thursday and the Dow soared nearly 350 points. Stock prices fell on Friday morning as some short names increased.

Evercore technical analyst Richard Ross said Thursday that he didn’t expect the wider market to be affected, even if GameStop’s deals were hit. SPDR S & P Retail ETF XRT, Creates volatility in ETFs.

“The bullish background of stocks is strong, intact and much larger than GME. When the latter stops rising, the former stops falling, and the XRT and GME are large against the most overbought measurements in ETF history. A large-scale early reversal, “he wrote.

BNY Mellon’s Grotesque Key points to other examples of turmoil, such as ride sharing and rent.

“Participation in a very stable financial market makes us wonder if we want change,” he said. “I’m going to talk about the feasibility of Long / Short Manager. It’s a call for awakening of liquidity and feasibility, all at Lexicon this week, and I didn’t expect it to happen.”

GameStop Traders May Have Hedge Funds Change Investment Tactics GameStop Traders May Have Hedge Funds Change Investment Tactics

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