Understanding the GameStop Stock Market Drama
Markets have been shaken again over the past two weeks as Reddit Day traders boosted shares of companies like game Stop. And sent short selling hedge funds running with long short funds losing 6% overall last month, and Melvin Capital alone, plummeting 53%. But most hedge funds emerged unscathed. And Steve Cohen's 0.72 even attracted $1.5 billion in new money. Here's sweet that Ramachandran, GAM investment manager, I assume hedge funds are probably reluctant to short small cap stocks right now, if the fear that the Reddit brigade might be behind those, But by early this week, game stops to the moon rally started to come back toward Earth, and not even the reddit flash mob or changes the top of the company. Could get the irrational exuberance going again reminding us why hedge funds and short sellers target companies like Gamestop investor that gets caught in the up dressed on that and doesn't understand that investing well, it looks like it's all going up to the person to click the last by understand that that could happen to them that quickly. That's former e trade financial CEO Carl Rossner. I ask Council on foreign relations senior fellow Sebastian Mallaby, if anything will fundamentally change. In the hedge fund world. I don't really, I mean, I think that hedge funds which of course, go back to the sixties, at least have proven to be an amazingly robust platform from which to think creatively about risk. Ondo. They adapt. You know they get new stuff yesterday in their ways when they began, there was no such thing as trading currencies because turned his world fixed it together one mark, it's hardly existed. You have to trade stocks by appointment on. They adapted all the way through that, As everything changed the authentic thea advent of reddit the advent of Robin Hood. This is just the latest iteration of the long, long history of financial innovation, and every time hedge funds figure it out. You also have regulators trying to figure it out as it were, after the fact we have the Treasure Secretary Janet Yellen now saying She's meeting with regulators, saying, We need to take a hard look at this about the volatility and whether this might actually put in jeopardy. Some investors. We also have hearings in Congress coming up. Do you expect there might be some tweaking, at least to the regulations? I think with respect to Robin Hood on the fact that it had to close down Access to trading on second stocks. That's the kind of market interruption which regulators order take action on. You need the infrastructure of trading to be reversed you, you know you need to look at the plumbing, and some regulators put it. And so the back part of the system will definitely because they're fresh. Look, What about on the short selling side? There have been proposals as you know, well for short, so staff to disclose their positions, individual positions, which is done is I understand in Europe. Do you think there might be a renewal of that call? And by the way, why do we have to disclose on the long side and not the short? I'm not sure, Actually, that hedge funds do disclose on the long side unless they buy more than Disposable fresh over believe it's 5% or something off the company so you could get away with a lot without disclosing. I think you know when you Taking a really big position. Probably there's it becomes a systemic threat to you. You know, you might blow up if that position where to go very badly wrong on so regulators to care about the soundness of the system ever all Have a legitimate interests, but I think it's more positions shouldn't have to be disclosed. But we certainly had some large hedge funds who took a big hit on. I wonder whether that did suggest it could be systemic risk here. Well, the beauty of hedge funds is that through their long history They've proven to be smart enough to fail. Not too big to fail, they actually can blow up and people often cite long term capital management in 1998 Aziz. The big exception actually, if you go back and look at that incident The New York Fed convened the banks to recapitalize them, but no taxpayer money. Zero went him. So freestanding hedge funds. I'm not counting here, the subsidiary of best stones that went wrong in a rage. Freestanding hedge funds have never had a taxpayer bailout mills in capital has not needed to taxpayer bailout. That's the good thing about hedge funds.