Defined Benefit
Insurance Assets

GameStopped—Or Just Getting Started?

GameStopped—Or Just Getting Started?
2 min 20 sec

Building upon what my colleague, Mark Wood, covered in an earlier blog post, I wanted to examine the long-term issues exposed by GameStop’s boom-and-bust experience, all but one of which seem relatively small or manageable within the current regulatory framework. While short squeezes of the sort that happened with GameStop are not new or unforeseeable, the SEC has been given a stark reminder of its 2010 mandate to enable more transparency of short-selling exposures in U.S. markets. Another issue raised during this saga is that the systemic risk of unsettled trades, which forced the online brokerage Robinhood to suspend client trading, can be reduced with trade settlement periods moving from T+2 days to T+1.

However, a bigger issue highlighted by GameStop, which will be more difficult to resolve, is the unintended consequences of zero-cost money and commission-free trading enabled by today’s highly stimulative monetary and fiscal policies. Bubbles forming and popping will likely be a common feature across markets.

As Warren Buffett astutely noted, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” Given Melvin Capital’s 53% loss in January at the hands of Robinhood traders, is the broader cadre of hedge funds and their short-selling techniques at risk of now being the patsy? With the short-selling issues highlighted in this experience, I outlined the following risk-management questions that institutional investors can ask their hedge fund managers in the wake of this match-up between supposed smart money and mob money:

  • What measures do you use to quantitatively gauge the level of crowding in individual short stock positions (e.g., short interest as percent of the stock’s float, short interest as percent of the stock’s average daily volume, cost of borrowing stock)? And how frequently do those measures get updated?
  • Since crowds love a story, how do you qualitatively assess your book of shorts to minimize the risk of any one becoming a meme stock like GameStop?
  • Although crowding is normally helpful—indeed needed—for early movers on a stock, how do you distinguish between an increasingly crowded trade that is generating profits versus a profitable trade that has become too crowded, long or short?
  • What are the investment guidelines for managing the risks of the short portfolio in terms of position sizing, number of positions, and industry diversification? Are those guidelines monitored and enforced by a risk management team, an investment committee, or the individual portfolio manager?
  • How much alpha did your short portfolio generate versus your long portfolio? For short exposure, how often do you use ETFs versus individual stocks? To express a bearish view on a company’s stock, do you prefer to use put options versus stock-based shorts? And why?

For a fuller discussion of the issues raised during the GameStop saga, please refer to my most recent Hedge Fund Monitor, accessible through the button below.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Defined Benefit

2021—Starting Off with Gusto!

Kristin Bradbury
How the economy did in 1Q21, and the outlook ahead.
Defined Benefit

What We Found in Our Latest COVID-19 Survey of Investment Managers

Amy Jones
The 3rd edition of our Coping with COVID-19 survey of investment managers focuses on plans for office reopenings and vaccination policies.
Defined Benefit

The Gray Areas in Green Bonds

Kristin Bradbury
A common challenge for those investing in green bonds is that there is no uniform set of requirements or standards. This makes analysis and monitoring...
Defined Benefit

The Story Behind Callan’s 2021 Capital Markets Assumptions

Capital Markets Research
An explanation of Callan's 2021-2030 Capital Markets Assumptions, how they were developed, and what changed from last year's projections.
Defined Benefit

Relief Bill Provides a Shot in the Arm to Corporate Pensions

William Emmett
The $1.9 trillion economic relief bill included another round of pension funding relief that reduces required, tax-deductible contributions for single...
Defined Benefit

Bloomberg Barclays Pricing Time Change and What It Means for Institutional Investors

Kyle Fekete
Asset owners, investment managers, and other parties may experience discrepancies in reporting point-in-time pricing or performance as a result.
Defined Benefit

Why the Yield Curve Is Really Curving

Dario Buechi
As prospects for growth have brightened, yields on longer maturity bonds have risen while short-term rates have been anchored by the Fed.
Defined Benefit

What Investors Need to Know About the Potential Eviction Crisis

Aaron Quach
Institutional investors should continue to closely monitor rent collections within their multifamily portfolios, as decreases in collections may indic...
Defined Benefit

Private Equity Goes on a Roller-Coaster Ride

Gary Robertson
A rough averaging across fundraising and private investment and exit volumes indicates a drop of only 20% for private equity activity in 2020 from 201...
Defined Benefit

What You Need to Know About the Net Zero Asset Managers Initiative

ESG Consulting Group
Under the initiative, asset managers work with the companies they invest in to set targets to reach net zero emissions by 2050.