Hedge funds have reduced the size of their bets on the stock market in recent days, after the volatility caused by groups of amateur brokers has raised the shares of companies like GameStop and inflicted heavy losses on some high profile companies.
The reversal of positions was observed by brokers and may have contributed to the sudden movements in some stocks, according to market participants.
Morgan Stanley said in a note to customers that Monday and Tuesday are among the five heaviest days for so-called revenue reduction in the past decade. The funds have not only hedged their short positions – the bets they placed against individual stocks – but have also sold shares in companies to reduce their leverage and reduce their gross exposure to the market.
Goldman Sachs said on Monday that there was the biggest reversal in shares by hedge funds since August 2019.
Professional investors are rethinking their strategies to face the growing influence of retail traders and the increasing risk of short selling shares. “If you are a risk manager for a large hedge fund, you have to change [your] calculation, ”said Greg Tuorto, portfolio manager at Goldman Sachs Asset Management.
Day traders who organize themselves on Reddit forums target specific short sellers and try to inflict losses by accumulating stocks they have bet against. Among the funds was Melvin Capital, run by Steve Cohen’s former pupil Gabe Plotkin, who became the target of retailers for his gamble against GameStop, a video game retailer.
GameStop’s shares have risen 435 percent since Friday, bringing the year’s cumulative earnings to 1,745 percent. Melvin said on Wednesday that it had covered its short position and repositioned its portfolio after losing about $ 3.75 billion in the first three weeks of January.
“This will change the way investors place their short bets,” said a professional trader. “Now you have a strategy for proactively causing pain. . . and actually put the wood for someone else. People will put things in place to prevent it from happening again. “
Long / short hedge funds – which take positive and negative positions on stocks – were the first to make a significant breakdown this week, but multi-strategy and macro funds are also shrinking, said Morgan Stanley.
The changes came at a time when retail traders began to dedicate themselves to an increasing number of shares. The stocks of 59 Russell 3000 companies rose more than 10% on Wednesday, even as the index itself fell just under 3%. Oil refiner PBF Energy gained 33%, cosmetics company Revlon rose 32% and retailer Bed Bath & Beyond jumped 43%.
American Airlines emerged after a Reddit user asked if the company would be the next GameStop. “AAL went short when all other airlines did not. Let’s get that bread wsb !! ”, Wrote the user, referring to the popular Reddit r / wallstreetbets page, before adding several rocket emojis. The airline’s stock closed the day 7 percent higher.
Carson Block, a major short seller, said he had significantly reduced his positions. “It is not rocket science – reduce your shorts enormously or risk closing the deal,” he said.
A shortfall in short sellers will have added fuel to individual stock price hikes. “At the moment, this is like a forest fire and will eventually go out,” said Brad Lamensdorf, a long / short hedge fund broker who runs Active Alts. “Everyone who is sold is under pressure and this will take the market to another extreme, preparing us for another correction.”
Volatility continued in the overnight trade when Wallstreetbets moderators briefly blocked non-subscriber access to the page. This caused some of its most talked about stocks to drop by up to a third before the page returned to its previous status and stock prices rebounded.
The best-selling companies on the Russell 3000 were the best performers on the index this year, according to the Bespoke Investment Group, weighing on hedge fund returns.
Paul Zummo, JPMorgan Alternative Asset Management Hedge Fund Solutions’ principal investment office, said he expected managers to keep exposure to “crowded names” to a minimum and limit their sales. “Given today’s environment, this is especially important.”
Additional reporting by Claire Bushey in Chicago