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Hedge Clippings | Friday, 05 February 2021
If 2020 was the year of COVID-19, then what will 2021 be remembered for?
If we are being optimistic there are a number of suggestions: Possibly the year of recovery? Given both the market and sections of the economy have recovered strongly, that's more than likely.
Or perhaps the year of vaccination? Very possibly, although it's unlikely (at least for most Australians) that it will be the year of unrestrained international travel.
Maybe, based on the gyrations and manipulation of various stocks caught in a so-called "short squeeze", it will become the year when small investors, enabled and encouraged courtesy of the use of social media and online apps, flexed their collective financial muscle against the big end of town, and in particular, hedge funds.
Except that no sooner had GameStop become a Game Changer than it looked like it is, or was, Game Over for those unfortunate retail punters (sorry, investors) who bought at the top, only to see their investment halve overnight, in a kind of financial game of musical chairs, or pass the parcel. Apart from the old age law that bubbles burst, or that balloons must eventually come down to the ground, according to the SMH the OECD is reported to be planning to rein in the retail frenzy. Which is good, as it will hopefully save at least a few inexperienced day traders. And those punters losing their government funded no fee broking account balances.
Hedge Clippings is not against the retail punter, nor are we against hedge funds who short poorly managed companies or those with yesterday's business models. Or, if it comes to that, heavy government regulation. We're not against free brokerage either, although we're a strong believer in the old adage that there's no such thing as a free lunch even though we've enjoyed a few long ones (in years gone past). If something's free, or too good to be true, there's normally a catch somewhere. A free broker selling information about their clients' collective order book to a hedge fund pays for the free trade deal, and thus tears before bedtime was the inevitable result.
There's a place for risk taking in a free market (although last week's fun and games could probably have taken place at the track, or casino, had it not been for social distancing rules) just as there are legitimate and sound reason for short selling. But we don't like market manipulation, be it artificially driving up a company's share price, or, as some of the more activist hedge funds do, intentionally driving it down in the first place. Could the extreme short squeeze happen again? Yes, provided the system allows for over 100% of a company's stock to be sold short (in GameStop's case this was over 140%). Or could it happen in Australia? Less likely for a couple of reasons, including a limit on the amount of short interest allowed.
There are those who would like to see short selling banned full stop. But that's an emotional view, not a practical one in our view. Shorting was developed as a way of reducing risk, although many now view it as risk taking. Shorting allows investors to have an opposing view, and when applied correctly can lead to fraudulent companies (remember Enron?) being found out. And if you ban shorting, do you also ban (or at least kill) option trading, as when an investor opens an option position it will generally lead to the option market maker hedging the other side of the trade, including depending on their position by having to buy, or short, physical stock.
Risk taking is an essential part of the market. Having both buyers and sellers allows the market to operate. Manipulation - either way - is not, hence the need for a sound regulatory framework, or playing field. Only allowing the game to be played at one end of the field is not the answer, irrespective of the fact that it's the little guy, or the big end of town, on the receiving end.
Finally, back to what 2021 might be remembered for? Hedge Clippings has noticed a significant change in the way crypto currencies are being viewed - and in the level of interest being taken in them from all levels of investors. A research report this week estimated that 1 in 4 Australians had traded a crypto currency, which in spite of the level of interest, seemed to be a high conversion rate of "lookers to bookers". No doubt driven by wild price moves, Bitcoin seems to take the limelight (including advertising on the side of a bus), but there's much more to crypto currencies than just Bitcoin. Going forward we'll investigate and provide an informed view from those who know and understand more about it than we do.
Closer to home at AFM, 2021 marks the launch of our new and updated www.fundmonitors.com website, and to mark the event we have thrown open access to our database to offer a free "no obligation" trial. Simply click here to take up the offer. Hang on, did we say there's no such thing as a free lunch? In this case there is, but not forever. We hope you'll try it, and in time you might just subscribe.
And if you don't like it, tell us. If you do, tell your friends and colleagues.
News & Insights
GameStop by Frazis Capital Partners
Making Sense of Nonsense by Delft Partners
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