At GAM Investments’ latest Equities Meeting, held on 2 February, two of our managers shared their thoughts on individual stock price surges and equity market short squeezes.
David Goodman – Technology Equities
We view the recent GameStop, Reddit and Robinhood saga as a black swan event. In this instance, the Reddit community ‘WallStreetBets’ swooped in to buy GameStop shares, seizing hedge fund leverage by buying the stock en masse and started squeezing shorts by driving up the share price. This in turn forced certain hedge funds to cover their positions, which sent the shares even higher. In the chat rooms, the episode was presented as a David and Goliath moment with the little man taking on the Wall Street establishment. For investors on the short side, such a situation creates a scenario where managing short exposure is paramount, irrespective of what the fundamentals for a specific stock are saying. Ultimately, we believe the situation is subsiding and fundamentals will always come back in the end. At the same time, identification of potential short squeezes is key and then the actual management of them is also vital.
Gianmarco Mondani - Developed Europe Long / Short Equity
The US equity market has been experiencing an unusual squeeze in popular short names. This has caused many portfolios in the long / short space to deleverage, possibly exacerbating the phenomenon. In our view, it is unlikely that European equity markets will experience such an environment to the same degree. We believe the risk of individual attacks is low. Short data in Europe is not as readily available and the size of the US market means there are many more names this new online cohort of retail traders on ‘WallStreetBets’ could focus on. Overall, we believe the rally in some heavily shorted names, when unsupported by fundamentals, will revert. This has started to happen in the US. Going forward, short sellers could start to look at these moves as opportunities, not just threats, although it makes sense to stay well clear of stocks where short interest and implied volatility reach extremely high levels, as they did in some of the US names that have been in focus of late.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.