Stock market participants are reevaluating how they trade after investors gathered on social media platforms like Reddit have devastated hedge funds with big pockets dramatically this week on Wall Street.
“Retail traders are likely to continue to be a force to be reckoned with, which is likely to permanently affect business models for institutional investors,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays, adding the continued compression of some favorites the actions were a “wake-up call” for Wall Street.
These dangers were highlighted after hedge funds like Melvin Capital were forced out of their short positions to buy back shares, increasing earnings from shares like AMC EntertainmentAMC and Gamespot. GME
On the other hand, retail investors who were able to correctly identify stocks in which short selling investors were vulnerable achieved considerable returns.
A portfolio of highly sold shares announced on Reddit has risen 150% in the past two months, according to data from Wolfe Research.
Watch: GameStop frenzy puts clearinghouses in the spotlight as investors assess systemic risk fears
Some money managers are already struggling to anticipate retail traders’ upcoming targets on platforms like Reddit and Discord.
The Financial Times reported that hedge funds were looking at so-called alternative data sets that track activity on Reddit to stay ahead of day traders.
In fact, Yin Luo, a quantum strategist and vice president of Wolfe Research, said his company created a tool that uses natural language processing to process large volumes of text on the subreddit forum wallstreetbets and assess which actions were targeted by marketers retail.
He then tracked how much of those discussions on Reddit turned into actual buying and selling of shares through Robinhood and other brokers who served retail traders.
Investors using the tools can thus mitigate the risk associated with maintaining short positions and knowing when a rush of retail traders would arrive and snap up the company’s short shares, said Yin.
Read: Robinhood’s day traders are squeezing hedge funds – here’s why it can continue