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RF Capital Management LLC, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 55.17% was recorded by the fund for the first half of 2021. The fund has gotten off to a strong start this year – especially in the first quarter where it generated a 42.82% return net of all fees. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of RF Capital Management, the fund mentioned GameStop Corp. (NYSE: GME) and discussed its stance on the firm. GameStop Corp. is a Grapevine, Texas-based electronics retail company with a $15.5 billion market capitalization. GME delivered a 977.81% return since the beginning of the year, while its 12-month returns are up by 2,764.03%. The stock closed at $203.40 per share on September 13, 2021.
Here is what RF Capital Management has to say about GameStop Corp. in its Q2 2021 investor letter:
"Although the initial trading frenzy has passed, the stock price continues to remain elevated as we write this letter. We don’t profess to understand the mechanics and exact details of what drove GameStop’s historic run. However, we did trade around our position in GME as it happened and took full advantage of the price action. Because GME has been well-covered in the media, we’ll just provide a brief overview of what happened.
GameStop’s stock price started the year at $19/share. Then volume started to increase midJanuary, and the stock traded in the $30’s and $40’s. In the last week of January, the meteoric rise of GME’s stock price occurred. GME’s stock reached an all-time high of $483 before crashing back down to the $40’s. Essentially, the stock price rallied 2,442%, crashed (wiping out almost $30 billion in market cap), and rallied again.
The prevailing narrative was the battle between retail investors versus institutions and hedge funds. Retail investors were participating in forums and social media sites like WallStreetBets on Reddit and Twitter to exchange ideas. Then, they used brokers like Robinhood, TD Ameritrade, and WeBull to execute their trades. As a result, retail investors started getting involved with companies like GameStop, BlackBerry, and AMC Theatres.
Because there was heavy short interest in companies targeted by retail investors, hedge funds and institutions who were short these names started getting squeezed. Hedge funds like Melvin Capital were the first casualties of the short squeeze. Famous and prominent investors and executives such as Mark Cuban, Chamath Palihapitiya, and Elon Musk only added fuel to the fire by tweeting about and commenting on companies like GameStop.
With so much mainstream coverage of GameStop and other companies, Congress and the SEC started getting involved. Congress held hearings and investors like Keith Gill (Roaring Kitty on WallStreetBets) testified. The SEC also became more vigilant with the volatility and trading of certain stocks. For example, trading of GME was halted four times on Thursday in the last week of February, and the SEC suspended trading of fifteen companies the next day.
As of now, it is difficult to tell whether or not retail investors will continue to drive stock prices of select companies significantly in the future. However, this “phenomenon” will most likely be here to stay. Forums such as WallStreetBets have been around for as long as the internet. Unless such forums are regulated in a meaningful way, investors will continue to exchange ideas and analyze companies with one another. Furthermore, the stock market will continue to be more and more accessible to retail investors. Apps like Robinhood will continue to make it easy for individuals to trade stocks with low to zero commissions.
The public’s sentiment towards Wall Street, institutions, and our government is unlikely to change either. For many retail traders, participating in the stock market is a way to pass the time as well as a way to “get back” at institutions, hedge funds, and the government. While it is unclear if individuals are targeting hedge funds and companies with heavy short interest intentionally, retail investors will continue to make an impact on market fund flows as they become smarter and more educated about investing..." (Click here to see the full text)
Based on our calculations, GameStop Corp. (NYSE: GME) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GME was in 18 hedge fund portfolios at the end of the first half of 2021, compared to 13 funds in the previous quarter. GameStop Corp. (NYSE: GME) delivered a -8.97% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.