Retail genie “out of the bottle”: Hedge fund giant Man Group says GameStop effect here to stay

Genie and lamp

The increasing democratisation of stock trading – and the growing impact of social media in market movements – is likely here to stay following last month’s GameStop frenzy, which could bring sweeping changes to the way hedge funds build short positions amid volatility surges.

Man Group, the London-listed global investment group which manages a range of hedge fund products, said the events of late last month suggest the retail genie is “now out of the bottle”, and compared GameStop traders to Trump supporters who attacked the US capitol building.

As a result of the GameStop saga, which played out on online discussion boards such as Reddit’s WallStreetBets forum, hedge funds may now be more reticent of taking short positions in small capitalisation or crowded stocks, said Keith Haydon, CIO of Man Solutions.

At the same time, the episode also indicates that retail flows have become a much more important factor in understanding market volatility than previously considered.

“The increasing democratisation of stock trading through technology and the role of social media in co-ordinating investors actions feels like a phenomenon that is here to stay,” Haydon wrote in a commentary on Tuesday.

“Maybe, after a decade or so of investors switching from active management to passive index trackers and ETFs, this represents a new dawn of active investors – one that we’re sure the established market players would welcome with open arms over the longer term, regardless of the recent flesh wounds.”

Haydon sounded a note of caution against “heavy-handed regulation” that could damage the integrity of markets, noting that “appetite for such forays into volatile stock trading will lose their appeal once enough members of the community have been burned.”

Following the initial rally in Texas-based video game store chain GameStop’s share price, which dealt bruising blows to a number of short sellers, the subsequent slump has hit retail traders with eye-watering losses.

Haydon compared the amateur online investors targeting shorted stocks to the Trump supporters who stormed the US Capitol building at the start of January, describing both sets as “a disparate band of protagonists, enabled by new technologies and social media, fed by conspiracies and half-truths… playing the part of modern Davids giving the establishment Goliaths a bloody nose.”

“Many of the Capitol raiders have now lost their jobs and are facing criminal charges. Many of the small investors from r/WallStreetBets have been buying equity in near bankrupt firms at as much as 30x the value of a month ago,” he observed.

“For both bands of players, it's hard to see what their sound and fury achieves in the short term.”

The dramatic events may have set the scene for another volatile year, Haydon said, as investors grapple with “huge swings” in economic growth and corporate earnings expectations as markets and economies look to normalise following the coronavirus crisis.

“If the last year, and the last week in particular, has taught us anything, it is that the long-term fundamentals of a situation are so often subordinate to the short-term sentiment, technical pressures and unexpected events."