It’s not the hedge funds that will be wiped out

Picture: AFP

In market terms, the attack on hedge funds by an army of US retail investors this past week feels bizarrely like the Trump inspired assault on the Capitol Building by a mob of protesters, a concerning number of whom were organised and had an ideological agenda against America’s democratic system.

The financial uprising which gained momentum on the US social media platform Reddit led to a herd of Millennial investors, armed with stimulus dollars taking Wall Street’s short sellers at their own game, on their own turf.

It is fascinating to watch from the safety of the sidelines, and well to remember that for every story of a fortune made, someone, somewhere is on the other side of the transaction. And it won’t just be slick hedge funds, masters in their field, who get wiped out. Far from it.

When a seller of video games like GameStop becomes irrationally overvalued by the market to the tune of US$20bn ($26.1bn), compared to its investment fundamentals, Isaac Newton’s famous line of what goes up must come down seems pretty apt.

In a nutshell, US company GameStop caught the eye of folk posting on the subReddit WallStreetBets platform as being shorted by hedge funds. To Redditors, these Wall street fund managers are the unacceptable face of capitalism. Put crudely, hedge funds can make big profits through targeting any company they see as weak. They borrow to buy shares in the company, which they then sell on market to drive the share price down, and later buy the shares back at a lower price. It’s called shorting the stock. To critics of these hedge funds, while shorting is legal, it is also market manipulation.

The Redditors decided ‘en masse’ to buy up GameStop, driving the share price up to almost US$500. This had the double satisfaction for Redditors of making money themselves on the ride up and hitting the hedge funds positioned on the other side with billions of dollars in losses as the shares went up. The Reddit movement is said to have grown to five million.

YouTube is running hot with foul mouthed smart millennial influencers like ‘cr1tikal’ an American podcaster and musician.

“Seeing them whining and moaning about it” he plays to the camera, mimicking the complaints from Wall Street. “Agh! This needs to be regulated! We need to stop this from happening, they are hacking the system!”.

“What’s happening?” he asks. “Hedge Funds have been doing it for years and now it is college students, normal average Joes instead of rich elite douchebags.”

Trawling though the subReddit WallStreetBets platform itself is instructive and expletive: a sort of mixture of inspired socialism and a Robin Hood return of riches to those who are more deserving. The controversial Robinhood trading platform has been the main broker for the Redditors. “Let the People Trade!” it famously posted back in 2016 as part of a mission to democratise finance.

No surprise then that Robinhood’s decision on Thursday, without notice, to halt further buying of GameStop, AME and BlackBerry causing the stocks to fall back has been met with cries of market manipulation of its own. Robinhood is now a traitor in the Wall Street camp.

More broadly, Robinhood’s decision has divided market players and market watchers. Did the risk of a destabilised market justify such intervention? It is certainly not free capitalism. And then there is the backdrop to all this market mayhem: a Federal Reserve pumping billions into the system and inflating assets prices. Howzat for market manipulation?

Coincidentally, tweeting away while in quarantine in Adelaide with his wife tennis great Serena Williams is Reddit Co-founder Alexis Ohanian. “This feels really personal for a LOT of people, tracing back to the 2008 crisis & recession in particular. I believe this has snowballed into something bigger and unprecedented. As I’ve said for over a decade now: Community is still vastly undervalued.”

But then a simple one line tweet from Ohanian appears: “Please only invest money you can afford to lose.”

One South Korean fund manager is reported to have cleared over $1 billion in profit form GameStop, having bailed out of early on Thursday at close the top of the run. Clever them.

Back on the subReddit WallStreetBet platform, there is a post telling Reditters that there are still three times the number freely traded shares in GameStop being shorted.

“As of today, GameStop’s Short Percentage of Float is 292.53%.” WTH????? We are still in the beginning!!!!”

Even if Robinhood had not intervened, a stock like Gamestop cannot keep rising forever. In the end, just like pyramid selling, just like Australia’s Poseidon Nickel, with its own fascinating market manipulation story, these things come crashing back to earth.