As we have seen last week, retail investors can exercise quite a bit of power in the broader market when they band together. In the past 3 weeks GameStop stock has risen over 1,600 percent driven by the operation of a multitude of retail investors pushing up the stock price to trigger a massive short covering by hedge funds. The ultimate question is have hedge funds been pushed out of the stock never to return or is this a temporary blip?
Let us start by taking a quick look at how hedge funds have been doing in the stock market. In truth, hedge funds haven’t been doing that well compared to gains shown by the S&P. Hedge funds have underperformed the S&P 500 every year since 2009. Hedge funds are also facing increasing competition from automated investing companies placing investments in exchange-traded funds (ETFs). Even with these headwinds there is no denying the power that hedge funds have due to the massive amount of wealth they have at their disposal to affect individual stocks and the global stock market.
My belief is that in the end hedge funds will win and the main reason is the amount of wealth they have at their disposal. While some hedge funds have taken a beating after covering their short positions in stocks like GameStop (GME), Bed Bath and Beyond (BBBY), and AMC Entertainment (AMC), most have the ability to ride out this rough patch. Yes, some hedge funds like Melvin Capital may go under but there will be many more hedge funds to take their place.
Most retail investors, however, do not have the amount of capital needed to survive if the stocks quickly plummet and stay down. Losing a couple of million dollars can be a drop in the bucket to large hedge funds but a retail investor losing $5,000 could mean the difference between paying rent or not. There is a saying that the house always wins and in this case the house is the hedge funds.
For this reason, Seabird Stocks has not jumped on the bandwagon and invested in these hot stocks and is waiting for the dust to settle. Congratulations to everyone that has booked profit on the dramatic rise of stocks like GameStop but do not expect the hedge funds to take this revolution lying down.
Be Smart, Be Safe, and Trade!