No sympathy for hedge funds

In this photo provided by the New York Stock Exchange, trader Robert Charmak, left, works on the floor, Thursday, Jan 28. Stocks were moving sharply higher Thursday morning, a day after sinking to their worst loss since October amid lingering worries about the long-term economic damage from the pandemic. Associated Press.

The GameStop stock frenzy, an episode that dominated headlines and sent the financial establishment into a panic, appears to be winding down. Share prices receded from their peak of around $500 to around $90 Tuesday afternoon (though who knows which direction they’ll continue to go in the coming days).

As the dust settles, a couple key takeaways become clear.

Punching up

Short selling is a tactic used by investors to turn around a quick profit. An investor borrows a stock, sells it, and essentially bets the price will go down before they have to buy back the stock and return it. On a large scale (i.e., when done by billion-dollar hedge funds), it can drive prices down, meaning investors are both betting on a company’s decline making them money and actively driving it into the ground.

If it works, it’s pure profit, but that’s not guaranteed. Investopedia notes short selling “involves amplified risk” and, when it really goes wrong, poses a risk of “infinite losses.”

Members of the subreddit r/WallStreetBets, the group largely responsible for the surge, are retail traders. Amateur investors. Everyday people interested in the stock market. Noticing GameStop’s stock price was heavily shorted, members banded together to buy up shares and drive the price up, or execute a “short squeeze.”

These people are often called “dumb money” on Wall Street, but this time they beat the elite at their own game.

As hedge funds’ short strategies backfired, short sellers lost more than $13 billion as of Monday. One firm, Melvin Capital, even received a $2.75 billion bailout from billionaire investors to stay afloat. The everyman had stuck one to the financial elite. While the gains may not be permanent, it shows collective action can make a difference, even against billion-dollar financial juggernauts.

Must be this rich to ride

On the flip side, it’s now abundantly clear the financial world is desperate to stay an exclusive club.

Hedge fund manager Michael Burry took to Twitter Jan. 27, decrying the GameStop surge as “unnatural, insane, and dangerous” and calling for “legal and regulatory repercussions” in a since-deleted tweet. Burry is best known for his investments betting against the US housing market, which he profited immensely from when the market crashed in 2007.

At GameStop’s peak, Robinhood, a stock trading platform popular with retail traders, restricted GameStop and other stocks targeted by r/WallStreetBets Thursday. Others followed. In some cases, CNBC reported, investors would only be able to sell, not buy, through the trading platforms.

Robinhood uses Citadel Securities for more than half of its customer’s trades. Citadel is part of the group that bailed out Melvin Capital after it lost big on GameStop. To say the least, this is not a good look. It would be reasonable to say it resembles market manipulation.

The move drew condemnation from across the political spectrum with both Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz calling for an investigation into Robinhood’s decision. Sen. Elizabeth Warren also released a statement calling out what she saw as a double standard.

“With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy,” Warren’s statement said. “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price. It’s long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do.”

Even before Robinhood shut out small investors, contempt for Wall Street was already motivating many r/WallStreetBets investors. When interviewed by the New York Times, one investor voiced frustration at the financial sector’s success post-2008 financial crisis. His wife said “eat the rich.”

The 2008 financial crisis, by the way, cost 10 million Americans their homes. A 2011 inquiry laid blame for the crisis on both the federal government for lax regulations and on Wall Street’s managerial incompetence and reckless strategies.

Outrage from the financial elite is self-serving and disingenuous given their history with risky plays dragging everyone else down, so no need to shed a tear for them when the little guys return the favor.