Hedge Funds Battle Retail Investors—Our Take - Adviser Investments

Hedge Funds Battle Retail Investors—Our Take

February 1, 2021

Please note: This update was prepared on Friday, January 29, 2021, before the market’s close.

It’s been a strange few days on Wall Street. Traders in a small number of heavily discounted stocks have waged battles, causing prices to more than double and then drop by half all in a day or two. The GameStop “short squeeze” saga has dominated the news, fueling high volume and volatility in the stock market, though most stocks have sailed blissfully along.

Set aside the preoccupation with a handful of frothy shares and you’ll see it’s been a relatively calm start to the year. Consider that Wednesday was the first day since early November 2020 that the Dow and S&P 500 indexes moved 2% in either direction. While today marks the second such drop for the Dow in January, last year we saw about four 2% moves every month.

On a total return basis, the Dow Jones Industrial Average was up 0.1% through Thursday, while the broader S&P 500 index was up 0.9%. The MSCI EAFE index, a measure of developed foreign stock markets, was up 0.6%. As of Thursday, the Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.16%, up from 1.12% at the end of 2020. The U.S. bond market has declined 0.6% this year.

Did GameStop Traders Game the System?

We don’t think the stock market is in a bubble—not as a whole. But we’re seeing certain assets and investment themes forming their own bubbles, including bitcoin and special-purpose acquisition companies (SPACs). This week, it was the long/short bubble, exemplified by the wildly volatile price activity of brick-and-mortar video-game retailer GameStop, movie theater company AMC, housewares retailer Bed Bath & Beyond and a few other notable stocks.

In our opinion, recent trading in GameStop is reshaping the traditional long/short dynamic.

Short selling, when an investor, or more often a trader, bets that a stock will go down in price, is typically dominated by institutional investors. But more recently, we’ve seen retail traders on popular trading apps such as Robinhood coordinating their purchases through social media. This synchronized buying created a short squeeze (when short sellers rush to buy a stock so that they are no longer short) that shot GameStop’s stock briefly beyond $480 per share, up from $40 a week ago and $20 on January 12.

The same dynamic propelled other previously depressed stocks, like Bed Bath & Beyond and AMC, which jumped higher this week before plummeting yesterday—though some of them are soaring again as we write this on Friday morning.

We think the gains in these stocks will prove fleeting. The price spikes of GameStop and the rest are clearly untethered from the underlying value of these companies and devoid of real research into fundamentals or critical thinking. A social media crowd targeting a stock that’s been heavily shorted can send a stock into the stratosphere, but someone is going to be left holding the bag when the fuel runs out.

Publicity around this long/short bubble may put an end to the current mania, at least temporarily. Regulators are sharpening their swords. Robinhood and peer app Interactive Brokers pulled the plug yesterday, blocking customers from adding to positions in some of the hot stocks, then were roundly criticized and revisited these decisions.

Whether driven by David versus Goliath zeal, millennials stuck at home during a pandemic, bored students cooped up in dorms or opportunists piling on, it gets messy fast and gives new meaning to “the wisdom of crowds.” We don’t see a whole lot of investing wisdom here.

Economic Recovery Exceeds Expectations

The U.S. economy shrank in 2020 for the first time since the financial crisis but made up ground in the fourth quarter and is forecast to continue its recovery into 2021.

The Commerce Department’s estimate of fourth-quarter GDP showed that the economy grew by 1.0% in the final three months of 2020; a 4.0% annualized rate. The ascent out of the deep hole that the coronavirus inflicted on the U.S. economy hasn’t been painless—new claims for unemployment benefits remain stubbornly above pre-COVID-19 record levels.

The relatively strong comeback from the biggest GDP slump since World War II doesn’t signal smooth sailing or full recovery in 2021. Risks remain, including political gridlock and the emergence of coronavirus variants that could prolong efforts toward herd immunity from the virus. That said, we’d rather be climbing out of a shallower crater than a deepening chasm.

Watch Our First-Quarter Webinar!

Tune in to Adviser Investments’ First-Quarter Webinar, A Tale of Two Recoveries: Will Main Street Catch Up With Wall Street? Click here for a link to the replay!

Chairman Dan Wiener and Director of Research Jeff DeMaso kicked things off with a wide-ranging conversation on lessons from 2020, the state of the economic recovery, the value of diversified portfolios and some reasons for both optimism and caution. After that, Chief Investment Officer Jim Lowell, along with other members of our investment team, fielded questions from the audience.

We hope you stop by and enjoy the presentation.

Podcast: Smart Money Moves for 2021

Putting together a comprehensive plan to manage your financial future can seem overwhelming—but it doesn’t have to be. In this edition of The Adviser You Can Talk To Podcast, four of Adviser Investments’ wealth managers and financial planners offer some quick tips and tasks that will help you take control of your finances, including action items for:

  • Managing cash flow and savings
  • Identifying goals
  • Risk management and legacy planning
  • Managing debt and credit
  • Income tax efficiency

Whether you’re just getting started in your financial planning or just need a little fine-tuning, this podcast will give you insight on how to make your money work for you. Click here to listen now!

Financial Planning Focus

Is Your Umbrella Open?

When unexpected storm clouds roll into your life, you don’t want to be caught without an umbrella. Insurance plays a critical role in protecting you from getting drenched—and for a truly robust wealth plan, it’s important to have more than bare-minimum coverage. That’s why we think financial planning consultations should always include a discussion of extending insurance beyond the traditional offerings.

A personal umbrella insurance policy—one that kicks in after the liability limits of your auto and homeowners policies are exhausted—can protect against potentially devastating liability claims. How does it work? Let’s say you’re at fault in a car accident and the cost of injuries to others is $600,000. Your auto insurance policy has a bodily injury limit that tops out at $300,000; absent umbrella coverage, you’re on the hook for the next $300,000. With a sufficient umbrella policy, you would have coverage for the additional damages.

A financial planner can help you determine the appropriate amount for an umbrella insurance policy. Generally, we recommend that it should roughly mirror your liquid net worth—that’s a reliable way to ensure everything you own will be protected against any potential litigation.

Unsure of your net worth? Start by listing your assets: Bank accounts, investments, home equity. Then add up liabilities: Mortgage, car and student loans, credit card balances, etc. Subtract the liabilities from your assets and presto! That’s your net worth.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income 

No trades this week.

AIQ Tactical Global Growth

Sold Fidelity MSCI Materials Index ETF (FMAT). Bought iShares US Home Construction ETF (ITB).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical High Income

No trades this week.

AIQ Tactical Multi-Asset Income

No trades this week.

Adviser Investments’ Market Takeaways

You can find two new Market Takeaways videos on our website. Research Analyst Liz Laprade brought a level head to the GameStop mania and Vice President Steve Johnson explained how Robinhood’s week demonstrates the critical importance of a good investment plan.

Looking Ahead

Next week, we’ll be looking closely at reads on manufacturing and the service sector, factory orders, consumer credit and the labor market, including January’s unemployment rate.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.


Please note: This update was prepared on Friday, January 29, 2021, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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