If you’re anything like me, you’ve probably been following the GameStop news story with huge interest over the past week or so.
I believe it highlights some important lessons for investment fund managers and those in professional money management.
A large community of Reddit users all bought shares in a company called GameStop, rapidly inflating its stock price to the detriment of hedge funds.
Prior to this move, GameStop (which is a video game retail outlet) had been struggling due to COVID. Because of this, hedge funds were holding short positions on the company’s stock – as the company wasn’t due to hit profitability for a couple of years.
But moves from the Reddit community changed this. The company’s stock rose from just $20 to a peak of just under $500. However, this volatility had an unintended consequence – trading app Robinhood placed restrictions on retail traders buying more GameStop stock.
This is because regulators increased the amount that Robinhood needed to deposit at its clearinghouses – causing anger amongst the retail trading community.
What’s the lesson?
There’s an important lesson here. It’s that online communities have the power to co-ordinate and influence asset prices incredibly quickly.
Investment fund managers need to be aware of this phenomenon, employ solid risk management strategies – and be alert to take advantage of any unexpected price volatility.
It also demonstrates that brokers and financial institutions can be vulnerable. That’s why we recommend diversifying your service providers, i.e. having more than one broker.
Do you want to create your own Investment Fund?
If you want to create your own Investment Fund, just email me. I’d be happy to talk you through how it works in further detail. Thanks for reading – I’ll be in touch next week with some more content.