Business

Analysis: Hedge funds bitching about Reddit can cry me a river

Posted January 29, 2021 11:11 a.m. EST

— The irony is delicious. An online flash mob beats Wall Street insiders at their own game.

Connected on social media during a work-from-home pandemic using free trading apps, the little guy sticks it to the man.

The man, of course, is Wall Street. Specifically, the high-frequency traders, hedge funds, and bank prop desks that for years have run the show.

Connected by the Reddit community WallStreetBets, small investors followed the advice on Reddit to drive up shares of GameStop, AMC and others. That buying spree cost the big hedge funds who were betting against those stocks billions."

It's a populist uprising armed with no-fee brokerage accounts instead of pitchforks. And no one is crying for the "sophisticated" Wall Street players.

There was immediate online derision after billionaire investor Leon Cooperman (who has no position in GameStop) said these traders "don't have any idea what they are doing" in an appearance on CNBC. "The reason the market is doing what it's doing is, people are sitting at home, getting their checks from the government, basically trading for no commission and no interest rates."

It was a lonely defense of the Wall Street elite, and this week the short squeeze became the newest front in America's class war.

Liberal economist Robert Reich tweeted: "So let me get this straight: Redditors rallying GameStop is market manipulation, but hedge fund billionaires shorting a stock is just an investment strategy?"

Senator Elizabeth Warren accused hedge funds of using the stock market "like their personal casino" for decades.

When trading app Robinhood Thursday restricted trading in the stocks championed on WallStreetBets, Congresswoman Alexandria Ocasio-Cortez mocked Wall Street outrage and scolded Robinhood for the move to "block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."

Across the aisle, Republican Senator Ted Cruz tweeted "Fully agree" to Ocasio-Cortez. (Sparking an ugly spat you can read about here.)

The entire episode cued up a vigorous debate over the Wall Street practice of selling securities that the sellers don't even own.

Billionaire Elon Musk has called out short-sellers who have bet against his company Tesla.

On Twitter Musk wrote, "u can't sell houses u don't own u can't sell cars u don't own but u *can* sell stock u dont own? this is bs -- shorting is a scam..."

Yes, often short-selling is just raw speculation, but sometimes portfolio managers use the tactic as a hedge against the risk of losing money in another related position. It's insurance.

But let's be honest. This digital version of Occupy Wall Street also has the feel of a get-rich-quick scheme or pump and dump operation from "The Wolf of Wall Street." The frenzy this week was not investing, it was speculation.

The tales of quick profits are a powerful elixir.

The son of a friend of mine heard from a pal on Reddit about GameStop and bought it in his Schwab account. In a few days, he made $20,000. He booked the profit Wednesday and paid off half his student loans. Good for him.

But the real lesson for everyone else now: don't bet it if you can't afford to lose it.

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