85% of Hedge Funds Now Use JPMorgan’s Tool to Monitor Retail on Social Media
Hedge funds that were shorting GameStop (GME) and AMC Entertainment Holdings (AME) in 2021 took on huge losses after an army of retail traders gathered forces on social media and triggered a short squeeze. The managers involved in those sagas suffered billions in losses, and some even had to close their doors.
To prevent such losses in the future, hedge funds are now ensuring that they do not fall on the “wrong side of meme-stock plays” by monitoring social media platforms and messaging boards commonly used by retail traders.
Retail Traders Are the New “Smart Money”
Historically, market participants viewed big players like hedge funds and investment banks as “smart money.” On the other hand, retail traders were considered “dumb money,” particularly in the stock market. However, retail-induced meme stock plays in 2021 demonstrated that “dumb money” could also be a force to reckon with for professional investors.
It all started when retail traders, unofficially led by Keith Gill (also known as u/DeepF***ingValue on the WallStreetBets subreddit) were convinced that the heavily-shorted GME was undervalued and that it had the potential for growth. If there was enough buying pressure on the heavily-shorted stock, it could trigger a “short squeeze” due to a cycle of short positions being liquidated.
Based on this, the retail community aped in, purchased the stock, held on to it even after triple-digit gains, and delivered billions in losses to hedge fund managers who were shorting it.
Similar to GME, AMC was heavily shorted by corporate short-sellers. However, retail traders came to the rescue and purchased up to 80% of the movie theater chain’s shares, while wrecking short-sellers in the process.
All of these events convinced hedge funds that it is best to observe retail traders for hints about where the herd might veer next. According to a survey by Bloomberg Intelligence, approximately 85% of hedge funds and 42% of asset managers are monitoring retail traders on social media. Notably, JPMorgan Chase & Co. has even developed an entire product for this purpose.
JPMorgan Offers “Through the Retail Lens”
Back in September, JPMorgan Chase & Co. introduced “Through the Retail Lens,” a tool that enables big traders to sidestep possible market chaos created by meme-stocks. More specifically, the tool provides information about securities that retail traders are likely buying and selling, as well as which the stocks that are retail taking about on social platforms.
By early December, about 30 asset and quant fund managers, in addition to JPMorgan’s own traders, were using the product. As of now, that figure has spiked to 50. Chris Berthe, JPMorgan’s global co-head of cash equities trading, said:
“The flow from retail is not something you can ignore if you are a professional investor. It’s a whole new investor class that has emerged, and it’s an investor class that’s actually getting themes right.”
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Hedge Funds Are Avoiding Taking Big Short Bets
It is worth noting that big investors have not only added retail monitoring to their agenda, they have also altered some of their trading strategies. For one, they are increasingly avoiding making bearish bets. Ihor Dusaniwsky, head of predictive analytics at S3 Partners, a data analytics firm that tracks short-sellers activity, argues that investors are not taking big chances with their short positions.
According to Dusaniwsky’s analysis of stocks that is compiled from at least $10 million worth of shorted shares, seven stocks in the US had short interest of 40% or more by the end of last year. In comparison, there were 40 such stocks in early 2020 and 19 in early 2021. Further, there was no stock with a short interest of 70% by the end of 2021. He said:
“In the back of every hedge fund’s mind is, ‘I don’t want to be on the wrong side of a meme-stock play.’ It’s a full-time job to make sure you don’t get hit by a bus.”
Do you agree that retail traders are the new “smart money”? Let us know in the comments below.