30, according to a regulatory filings known as 13-Fs. Hedge funds including Maverick Capital, Shellback Capital, Landscape Capital Management, and Engineers Gate Manager LP were among those that added a new position or increased their stakes in GameStop during the quarter that ended Dec. First, not everyone is smarter than average, and second, even fewer people are smarter than hedge funds when it comes to trading.NEW YORK, Feb 16 (Reuters) - A handful of small hedge funds were in a position to profit from the Reddit rally that sent shares of GameStop Corp (GME.N) and other out-of-favor stocks rocketing higher last month at the expense of prominent investors who had bet against the stocks, according to securities filings released Tuesday. However, day trading and stock picking is a money-losing activity, unless you think you can outsmart other traders. Investing in the stock market is a good idea for long-term investment. For instance, it is a good idea to invest a fraction of retirement savings in the stock market, and it is good practice to buy a diversified portfolio such as a low cost, broad-market Exchange Traded Fund (ETF). The answer is obvious: it is because individual traders always lose at the expense of hedge funds. The fact that payment for order flow is a profitable business is very telling: why are hedge funds willing to pay to be allowed to trade with individual traders? The very business model of trading apps like Robinhood relies on the fact that amateur traders lose money in the stock market. This practice is called “ payment for order flow”. It makes money by selling to hedge funds the right to trade with its customers. Robinhood does not charge any fee to its customers. In fact, the very business model of trading apps like Robinhood relies on the fact that amateur traders lose money in the stock market. He also shows that more experienced traders perform a little bit better, but even they lose money, they just lose less money than the less experienced traders. He shows that they lose money on average. My colleague at HEC Paris, Finance Professor Jean-Noël Barrot, studied the performance of individual traders in France. The main lesson is that it is naïve to believe that amateur traders can beat hedge funds at their own game. Hedge funds have a lot of resources and brain power, and better access to information than retail traders. So what lesson can be learned from this story? Learn more on my blog post, What is happening with GameStop. When the price eventually crashed, because every bubble eventually crashes, people who bought at the peak of the stock price lost a lot of money. In particular those who bought when the stock price was already very high, thinking they could make quick and easy money at the expense of hedge funds. It is also true that a few amateur traders, those who started the short squeeze by buying GameStop when the price was low and sold it when it was high, made money.īut many individual traders also lost money. On this part, it is true that amateur traders played a clever trick to the short sellers. By buying the stock, the short-sellers not only lost money, they also further increased the price and contributed to increasing their own losses. This generates losses for short-sellers and leads short-sellers to close their short positions, which means buying the stock. They bought massively GameStop’s stocks to push up the price. Amateur traders on Robinhood coordinated an attack on the short-sellers. To short-sell a stock, hedge funds borrow the stock, sell it in the market, and expect to buy it back later at a lower price, and therefore make a profit. A number of hedge funds started to short-sell GameStop. GameStop is a brick-and-mortar video game retailer, which hedge funds deemed was over-valued. This view has some superficial element of truth, but I believe that it is fundamentally misleading.įirst, let’s explain the part where amateur traders take a revenge on hedge funds. The story has often been presented as amateur traders taking a revenge on Wall Street hedge funds. What are the mechanics behind this affair with GameStop?
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