Fun and GameStop in the bedroom
It looks like we’ll all be staying in this Valentine’s Day. But multi-asset fund manager Will McIntosh-Whyte is looking forward to some quality time away from the screens.
A year ago on Sunday I stayed in on Valentine’s Day with a runny nose and the PlayStation. Little did I know that this was something of a window into the next 12 months.
The staying in part anyway. The thought of playing computer games, of adding more screen time on top of the endless Teams work calls, Zoom catch ups with friends, WhatsApp inundations, usual work screen time and Netflix binging (is there a series David hasn’t seen?)…Let’s just say it doesn’t fill me with joy. It’s so pervasive in all our lives at the moment, that our team considered investing in an eyecare specialist that will no doubt (sadly) benefit from the impending explosion in myopia.
The one sanctuary I have so far protected from screens is the bedroom – despite my girlfriend’s best efforts. Although not completely. There’s no TV, but if it’s not the iPad snuck in to continue watching House into the wee hours, it’s endless trawling through Reddit threads looking at everything from dog memes and keeping backyard chickens, to coronavirus conspiracy theories. Yes, my bedroom is a very romantic place to be. Sadly, despite her Reddit compulsions, Emma isn’t sitting on a pile of profits from GameStop longs. At least not that she has told me.
Emma appears to be about the only person reading Reddit that is not piling into complicated trading strategies to make a fast buck – at the expense, it seems, of certain hedge funds. Much has been written on this, many doing a much better job than me. But the long and the short of it is that certain retail investors (some ex-investment professionals) identified GameStop as being a heavily shorted stock – i.e. investors were betting the share price would fall. In this particular case, such was the scale of the short position, more shares in the company had been borrowed to enable the shorts than actually existed. WallStreetBets (the now infamous Reddit group) members saw that these investors, mostly hedge funds, were susceptible to a ‘short squeeze’: When the share price rises, everyone who is short the stock has to either put up more cash to their broker to show they're good for the money or buy the stock to get out of their short. If they buy, that pushes the price higher, causing more pain to other short investors and forcing them to buy, creating a feedback loop. It becomes like musical chairs because these short investors need to buy more shares than there are to go around. And if they don't get a chair they’re potentially bankrupt, so they all start buying at any price and the stock explodes.
Respect the strategy
The Redditors’ strategy was therefore to go long the stock, and encourage as many people as possible to follow their lead. And word soon spread. With many doing it through options (yes retail investing is changing), magnifying their exposure and driving the price up. This then creates the aforementioned feedback loop. The price of $4 in the summer ‘crept’ up to $19 by year end, before ramping to approach $500 at its intraday peak – a market cap of over $33bn, up there with Barclays bank.
This is not the first story of its kind, with several other recent examples of so-called YOLO (you only live once) trades, nor will it be the last. With the rise of the information age and brokers offering zero commission trading on complex instruments, access has never been easier. This has perhaps been accentuated by the recent pandemic – a combination of government cheques, no boss looking over your shoulder and, some have even argued, a lack of sport to bet on last year, has triggered increased interest in investing. Retail investors have always had an impact on the market. Many point to the current shenanigans as signs of a market peak – referencing 2000 when retail investors were adding to the feeding frenzy on tech stocks long on hope and short on revenues. But in this more recent case it was a well thought out and executed strategy taking advantage of a technical oddity in the market. Something plenty of hedge funds might have done themselves.
You only live once
For those on the GameStop sidelines, this kind of market action can provide opportunity. Part of the broader market sell-off surrounding this event was blamed on hedge funds liquidating their long tech positions to put up money to their brokers for GameStop shorts. And this offered a buying opportunity for those happy to look through the noise. Equally it serves as a warning. A reminder that leftfield events are exactly that – they come out of nowhere. And large, heavily levered hedge funds caught with their pants down can cause a broader market impact – just ask LTCM (or read Roger Lowenstein’s When Genius Failed).
The sad truth is that, while some in the vanguard of this trading will have made substantial gains from a clever strategy, there will be others late to the party. Caught up in the FOMO (fear of missing out), they piled into an area they didn’t understand just as the chairs were pulled away – with possibly devastating financial consequences. Those who bought GameStop in the last couple of weeks are now deeply underwater; those who did so through short-dated puts (options to sell the stock at a set price) have lost all their investment. As for the losses suffered by hedge funds, there will be few tears shed for Axe Capital’s brethren. The latest turn of events is a flurry of suspicious posting activity from bots seen on WallStreetBets – less scrupulous hedge funds fighting back?
So this weekend ditch the FOMO. Put down the phones, close the iPads and turn off the screens, and spend some quality time with your partner. YOLO.