[ I N D E P T H | G A M E S T O P ] relatively balanced , you ' ve had a certain view of how much risk any single-name short position could be ,” Raj Mahajan , global head of systematic client franchise at Goldman Sachs , said alongside Marshall in the Goldman Sachs podcast .
“ But what we learned last week is that the risk models didn ' t contemplate a 10x move in the short against you or a 20x move in the short against you .”
As their positions became increasingly squeezed , hedge funds were also forced to reduce their leverage by trading in more solid and secure stocks . This in turn has meant that long-only buy-side firms have felt the effects of the volatility taking place in the short market .
“ This situation was important for long investors to understand because all of a sudden hedge funds started selling long positions in other solid names where asset managers were investing , and all of a sudden you had some limited selling pressure in these names ,” says Christoph Hock , head of multi-asset trading at Union Investment .
Not dissimilar from the way Yahoo message boards were used by traders in the past to inform themselves about trading strategies and trends , institutional traders will now have to pay greater attention to information posted on social media platforms such as Reddit and Twitter .
Retail participation in a particular stock will have to be assessed further by those intending to invest in it and hedge funds in particular will have to pay close attention to posts on Reddit in order to stay ahead of the curve .
“ These days to fully get the picture right to understand what ’ s going on in the market you definitely have to take into account what retail investors are doing ,” adds Hock .
Institutional investors may also be forced to further diversify their portfolios with alternative assets and strategies as a means to mitigate the risk associated with volatility in the equities market .
“ Asset managers will be increasingly aware of the asymmetric risk associated with shorting single-stock equities , particularly within market-neutral and traditional long-short vehicles and mandates . Instead , these traditional stock pickers will need to invest in the expertise of risk management via derivatives and more diverse hedging strategies ,” explains Keslo .
Eight-year highs in silver prices caused by retail investors following GameStop also forced Aberdeen Standard Investors to introduce a ‘ Reddit Clause ’ to its physically backed silver exchange traded-fund ( ETF ), referring to the potential manipulation of
" A co-ordinated and well-informed market manipulation used retail platforms like Robinhood to squeeze shorts on the likes of GameStop and AMC ."
STEVE KESLO , HEAD OF MARKETS , ITI CAPITAL
silver pricing through social media campaigns .
Financial regulators now face a conundrum on how to regulate this squirming mass of individual social media accounts and how to determine what constitutes market manipulation . As the situation reached a crescendo on 28 January Robinhood was forced to place a ban on users purchasing securities such as GameStop that had gathered momentum on social media .
Since then , outraged retail investors have filed multiple lawsuits against Robinhood , infuriated that institutions were not subject to similar bans and restrictions on trading . The question of whether access to the stock markets is sufficiently democratised is now firmly on the table and will continue to be debated for months to come .
While the US equities markets has ultimately righted itself , the GameStop saga has identified a weakness that will need to be addressed . The face of the market has changed and with a growing number of people now able to access and share information through social media , the door remains open for further turbulence that could negatively impact institutional investors .
“ Asset managers and hedge funds will start to pay a lot more attention to the risks around social media and its potential impact ,” McLoughlin concludes .
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