According to a survey by Bloomberg Intelligence, 85% of hedge funds and 42% of asset managers are tracking retail-trading message boards in an attempt to determine where the herd of day traders might stampede next, reports an article in The Wall Street Journal. It’s an example of how much new investors have changed the landscape of investing, and many professionals are giving this new class of investors credit for getting themes right.
As phone apps made it easier to trade stocks and volatile markets proved too tempting to resist, more than 10 million investors opened new brokerage accounts in 2020. Banded together by social media, those new investors drove stocks like GameStop, Hertz, and AMC soaring and legitimized cryptocurrency investments that many professionals had written off as a joke. According to a JPMorgan estimate, more than a third of daily trading activity was done by individual investors over the last 18 months.
In 2021, $292 billion (net) of U.S. stocks and ETFs were bought by individual traders—more than 7 times the amount in 2019—and 2022 looks like it will be just as busy. However, a lot of amateur investors—inexperienced, taking on debt without understanding what they were doing, and goaded into riskier strategies—lost money. And with more volatility ahead, some managers believe that new investors will be bumped out of the market. But if there’s one thing new investors seem to have in common, it’s a strong stomach for volatility. In 2021, the eight biggest buying days by new investors were when the S&P 500 dropped 1.3% or more.
In fact, it appears that this new class of investors has already influenced the way some professional investors make bearish bets, the article contends. When professionals were betting for meme stocks like GameStop to fall, they were forced to buy back shares at higher prices when amateurs sent those stocks through the roof. Now, professionals are taking less risk with their short-selling plays; according to one analysis mentioned in the article, no stocks at the end of 2021 had short interest of 70% or more. And some firms are offering new tools to help clients identify which stocks have high levels of short interest and which ones could lose big if individual investors flood in. When it comes to meme-stock plays, no hedge fund wants to be on the wrong side again.