Sharks arrive at the GameStop party

·4 min read

Wednesday, February 3, 2021

A version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Retail traders have had a great year. Investing pros are having their say, too.

On Tuesday, we highlighted the performance of stocks favored by retail traders over the last year.

These returns suggest the current rally from the March 2020 lows has been a golden age of retail traders sticking it to hedge funds. A popular subplot of the recent fervor around GameStop (GME) and other heavily-shorted stocks is that these trades are a way for David to take on Goliath.

And while we’ll leave the motivations of those who think a short squeeze is actually a political revolution for another newsletter to tackle, it’s clear these investing Goliaths took notice of what’s gone in markets of late. And these sharks arrived to take their cut of the spoils.

Bloomberg’s Katherine Burton and Katherine Doherty reported on Tuesday that hedge fund Mudrick Capital booked a profit of around $200 million on positions in both GameStop and AMC Entertainment (AMC). Mudrick, which has about $3 billion under management, returned just under 10% in January according to Bloomberg, marking one of its best months since inception.

Late last week, we learned that investment firm Silver Lake had made about $113 million after converting $600 million worth of debt in AMC to equity and then selling the entire position during the massive surge in the stock price.

And a report from Bloomberg on Tuesday said Steve Cohen’s Point72 — which injected $750 million into struggling hedge fund Melvin Capital last week amid a short bet on GameStop gone wrong — has raised some $1.5 billion after re-opening the fund for fresh capital amid what sources called an attractive investing backdrop.

Last week Cohen, who also owns the New York Mets, had to clarify on Twitter that his investment in Melvin has no bearing on the financial health of the Mets. Cohen later deleted his Twitter account, citing threats against his family.

Steven Cohen, Chairman and CEO of Point72 Asset Management, speaks at the Milken Institute Global Conference in Beverly Hills, California, U.S., May 2, 2016. REUTERS/Lucy Nicholson
Steven Cohen, Chairman and CEO of Point72 Asset Management, speaks at the Milken Institute Global Conference in Beverly Hills, California, U.S., May 2, 2016. REUTERS/Lucy Nicholson

Now it appears Cohen is motivated to remind the world how he made enough money to buy the Mets in the first place. And that is trading stocks.

That hedge funds are both cashing in on these meme trades and seeing market dislocations as an opportunity shows the challenge that lies ahead for retail traders. More attention on what Redditors are buying, selling, or short squeezing makes life harder for a retail investor base that benefitted from being ignored by mainstream Wall Street investors.

“Unless the door closes (i.e., through a major regulatory change), we fail to see why retail investor interest in trading specific names will completely go away given how elevated cash on the sidelines is among consumers,” said strategists at RBC in a note to clients published Tuesday. “Ultimately, this may be good for active managers by creating more dislocations, even though recent moves have admittedly caused some pain in long-only portfolios in early 2021.” (Emphasis ours.)

Institutional money may have spent the last six or even nine months questioning how durable the role of small-time traders are in this market. But no one is asking this question now.

Instead, the question for big money investors looks set to change from when does it end to what can we learn?

As RBC writes: “We think it is particularly interesting that some of the more well known trades that retail investors have made over the past year have been those associated with classic deep value investing (buying the stock market in the middle of the recession, buying airlines and cruise lines last summer, and implementing short squeezes this winter) – a playbook that has been largely abandoned by the institutional investor community over the past decade in favor of growth, momentum, and quality investing strategies.”

By Myles Udland, a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland


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