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John Husselbee
John Husselbee 09-02-21

Stonks, GameStop and Robinhood – a brave new world of investing?

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise.

Investment stories rarely make the front pages – beyond intermittent ‘billions wiped off in single day’ headlines – so it has been fascinating to watch events surrounding US firm GameStop, several hedge funds and an army of social media-fuelled day traders in recent weeks.

In a plot straight out of television’s Billions – which charts the market-manipulating misadventures of hedge fund mogul Bobby Axelrod – we have seen hordes of traders take to discussion board Reddit and hatch stock bets in an attempt to spark a short squeeze and attack hedge funds. US firm GameStop has seen much of the activity, with the struggling video game retailer among the heavily shorted stocks to see its share price rocket and then fall away as amateur investors piled in. The fact trading in this company and several others was restricted on certain platforms – one, in another TV-worthy twist, named Robinhood – has added fire to the prevailing story of plucky outsiders versus the privileged elite.

Now the dust has settled for the most part and GameStop shares are close to where they started, having shed billions of their own, it is worth examining what the fuss was about and whether it might signal wider changes in investment. While it seems an exaggeration to claim social media has changed stock markets and trading forever, as some commentators have, there are clearly developing trends we need to consider.

To cover off that first term in the headline, stonks is an intentional misspelling of stocks that originated with an internet meme; a picture of a man in a suit, standing in front of numbers, alongside a big, orange arrow. It became synonymous with the frenzied trading in GameStop, highlighting the growing ‘gamification’ of investing, with so many people stuck at home during lockdowns and turning to day trading to relieve boredom.

GameStop is a US retailer of physical video games but with a growing trend towards downloading and stores shut during lockdowns, the business is facing a challenging future. Understandably, this has seen its shares subject to growing short interest from hedge funds.

Over recent weeks, however, the stock became the poster child for Reddit users, particularly on the WallStreetBets community, looking to squeeze these short sellers, with a surge of buying driving huge share price growth. Around 20-30% of flows in the US are from so-called mom and pop traders and, while this is usually spread across the market, social media was able to focus much of this volume on to a few names. As a result, over the course of just 16 days in January, GameStop shares rocketed from under $20 to nearly $350, growth of over 1,300%, leaving a number of hedge funds – which borrow shares in the expectation of them falling in value ­– facing billions in losses.

This short squeeze passed quickly, however, with many hedge funds rushing to cover their positions and the shares declined just as precipitously, plummeting back towards the initial price at the start of February. Meanwhile, other shares favoured by the Reddit warriors have also experienced notable price jumps including Bed Bath & Beyond, AMC Entertainment and Blackberry, with commodities such as sliver also targeted.

These price changes have been so extreme that several major discount brokers and platforms imposed freezes on certain stocks, largely sparked by spiking margin requirements, and faced criticism from market participants and politicians alike, especially as hedge funds could continue trading. As stated, this has fuelled the ongoing David versus Goliath narrative and, while interesting, this debate, as well as the fundamental ethics of shorting stocks, are beyond the scope of this article. One counterpoint to consider, however, is that if a group of ‘professional’ investors formed a group with the express purpose of touting and bidding up out-of-favour stocks, they could expect a fairly rapid visit from law enforcement.

What we do need to consider is how much this activity could affect our Multi-Asset funds and portfolios and whether it will increasingly become part of financial markets? The first of these is much easier to answer: within the ranges we manage, there are no underlying funds that participate in short selling so recent and future short squeezes should have no adverse impacts. Most of the activity has also been limited to the US but, more recently, heavily shorted UK stocks such as Cineworld and Pearson also saw their share prices rise as retail investors took the battle to hedge funds.

Taking a longer term, broader view is more challenging and there are a few points to consider. First, short squeezes are not uncommon, with Volkswagen briefly becoming the most valuable company on the planet in 2008 for example. The difference in the latest bout of activity is the ‘retail’ nature of the investors driving it, with social media and forums enabling rapid, widespread sharing of ideas and a range of platforms allowing anyone to trade immediately and cheaply. With a small amount of money and a simple app on your phone, literally anyone can be a day trader.

Along similar lines, we have also seen a significant growth in options trading, allowing retail investors to take leveraged positions in companies. They can buy options on underlying stocks at a 100:1 ratio for a tiny fraction of the cost of 100 shares, for example, and this activity is clearly adding to market volatility.

For a long time, short squeezes and this kind of leveraged investing were the preserve of professional investors but this has clearly changed in the world of social media and discussion boards. We would also point to the current strain of anti-establishment thinking in the US and Covid-19 as exacerbating these trends; on the latter, many people have been furloughed or lost their jobs in the pandemic and are looking for ways to make ‘easy’ money, with a large amount of the stimulus cheques given to US citizens flowing straight through phones and into stock markets.

One point to recognise is that stocks like GameStop are relatively few and far between, needing to meet two criteria necessary for an effective short squeeze. The first is that the stock is relatively easy and cheap to borrow for the purpose of shorting; the second is that there is a low free float number of shares to trade. The fact the company does not have many freely available shares to buy and sell, and many of those are locked up in long-term funds, means it is not that difficult to bid up the price if you are looking to hurt hedge funds.

As an industry, investment has been slow to change over recent decades, keeping to the basic model of ‘professionals’ telling investors where to put their money. Social media is revolutionising this relationship, as it has in so many other facets of life, and whether this is seen as positive or negative likely depends on which side of the democratisation versus gamification line things ultimately fall.

Either way, it will be important to monitor how the narrative around stock markets and investment evolves in these increasingly important communication channels over the years ahead, especially as the world continues to emerge from the shadow of Covid-19.

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Key Risks 
 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
 
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Disclaimer
 
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
John Husselbee
John Husselbee
John Husselbee has 35 years’ experience managing multi-asset, multi-manager funds and portfolios. Before joining Liontrust in 2013, John was co-founder and CIO of North Investment Partners and Director of Multi-Manager Investments at Henderson Global Investors.

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