Stock market participants are reassessing how they trade after investors congregating on social media platforms like Reddit dramatically devastated deep-pocketed hedge funds on Wall Street this week.
“Retail traders are likely to remain a force to be reckoned with, likely to have a lasting impact on institutional investors’ business models,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays, adding the ongoing short squeeze of a few favorite stocks. were a “wake-up call” for Wall Street.
Those dangers were brought to the fore after hedge funds like Melvin Capital were forced out of their short positions to buy back stocks, boosting earnings for stocks like AMC EntertainmentAMC and Gamespot. GME
On the other hand, retail investors who have managed to correctly identify stocks where short-selling investors were vulnerable have achieved significant returns.
According to data from Wolfe Research, a portfolio of high-short stocks touted on Reddit is up 150% in the past two months.
See: GameStop frenzy spotlights clearing houses as investors weigh fears of systemic risk
Some money managers are already anticipating the next targets of retailers on platforms such as Reddit and Discord.
The Financial Times reported that hedge funds were looking at so-called alternative datasets that track activity on Reddit to keep ahead of day traders.
Indeed, Yin Luo, a quantitative strategist and vice chairman of Wolfe Research, said his company came up with a tool that uses natural language processing to process the large amounts of text on subreddit forum wallstreetbets and assess which stocks were targeted by retailers.
Then he tracked how many of these discussions on Reddit turned into buying and selling stock through Robinhood and other brokers targeting retailers.
Investors using the tools can thus reduce the risk associated with holding short positions, and learn when a rush of retailers would arrive and grab the shorted company’s stock, Yin said.
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