The retail investor-driven rally in United States equities that cost hedge funds more than $20-billion has come to an abrupt end. This signals the end of fears that the Reddit-inspired surge in equities would spread to the JSE.
Financial market fears that the Reddit forum WallStreetBets would inspire a surge in equities as retail investors ploughed into South Africa’s most shorted stocks initially seemed to have some validity as the JSE All Share index climbed to an all-time high aided by equities such as Steinhoff.
Steinhoff, the beleaguered furniture and household goods retailer, saw its share price climb from R1.21 a share to a one-year peak of R2.15 a share.
The JSE All Share Index lifted stocks higher as it rose from 63 713 points to an all-time high of 64 556. This added to concerns that a GameStop-inspired swoop could be imminent on the JSE’s most shorted stocks, including Steinhoff, MTN, Telkom, Capitec, Implats and Discovery.
The rally in GameStop, a Texas-based video game retailer, was part of an unprecedented surge in some of the US market’s least-loved stocks, which were also among the most heavily shorted shares by US hedge funds.
Hedge funds have traditionally made billions of dollars in profits by taking bets on stock prices falling, a practice known as “short selling”.
Retail investors piled into shares of GameStop, AMC Entertainment, Nokia, Blackberry, Bed Bath & Beyond in an effort to counter the short positions held by hedge funds, drive up share prices and inflict heavy financial losses, a practice known as the “short squeeze”.
GameStop shares gained 400%, leading to an overall appreciation of 1 625% since the start of the year.
Short sellers of the video game retailer recorded losses of about $20-billion in January alone as retail investors squeezed hedge funds, leading many to close out their positions at historic losses. Hedge funds that reported heavy losses included Melvin Capital, which lost 53% of its assets in January. Losses were also registered at Citadel, Point72, Candlestick Capital and Maplelane Capital, which registered a 33% loss.
Chantal Marx, head of external research and content at FNB Wealth and Investment, says: “If there is a repeat of GameStop in our local market then Steinhoff would probably be the most obvious candidate because it is dual-listed, but I don’t think there will be a pumping and dumping of shares in the South African market on its own because we have a small retail trading market and our day traders just don’t have that kind of cash behind them.”
She says that one could look at other heavily shorted companies such as MTN and Telkom. But, because of the small retail investor market and the fact that they are only listed on the JSE, it is unlikely that they could be open to manipulation.
“The way the South African market is structured and regulated makes for a much more boring setting. I am sure there are guys out there doing what they should not be doing, but I think generally our market is too small and concentrated to have a big issue like we saw with GameStop. Also, our retail investor market penetration is very low with individual self-managed investors mostly concentrated in Exchange Traded Funds,” says Marx.
Jean Pierre Verster, chief executive officer of Protea Capital Manage-ment, also argues that a move similar to GameStop is unlikely in South Africa given that the short interest in Steinhoff is roughly 6% of the company’s issued share capital compared with GameStop, which was more than 100%.
He says he could not find any shares on the JSE with a particularly high short interest, which makes sense because the hedge fund industry is still tiny compared with the traditional long fund management industry in South Africa.
“The hedge fund industry in South Africa has shown that it is resilient and has benefited from regulation. Good risk management processes have also been implemented and therefore I don’t see a lot of the things that are happening in the US being repeated in South Africa such as hedge funds losing more than 50% of their clients’ money in just one month.”
Verster says retail investors who have bought at high prices will end up losing a lot of money when shares return back to their fundamental value.
According to posts on WallStreet-Bets, many investors felt the reckless actions by hedge funds were a reflection of the wider failings of a financial system run riot with a lack of oversight by regulators.
What retail investors felt they were doing was inflicting losses on a financial elite that they blamed for the 2008 financial crisis, which resulted in many of their family members losing their homes, jobs and financial stability.
WallStreetBets traders wrote about how they felt the financial system was rigged against them. They protested about the loss of jobs as a result of the Covid-19 pandemic.
They railed against perceived media bias. They felt they were now sticking it to “the man” by applying short squeezes on the financial sector.
Retail investors used a host of low-cost share trading apps such as Robinhood, Interactive Brokers, E-Trade and Webull in an attempt to circumvent the traditional Wall Street brokerages.
These platforms were widely criticised when they announced that they had suspended trading in GameStop and other shares after unprecedented demand from investors.
“A lot of people believed that there was some conspiracy between the Federal Reserve and hedge funds to try to stop them from participating in the market and I think it’s important to note that it is nothing of the sort. It’s simply the checks and balances to make sure the plumbing of the financial system doesn’t get clogged up that led to these platforms telling their clients that they cannot trade,” says Verster.
Bipartisan support from Democrats and the Republicans for these platforms to reopen trading followed as Democratic representative Alexandria Ocasio-Cortez and Texas senator Ted Cruz voiced solidarity with traders.
What traders were also able to achieve was to inadvertently make Wall Street regulation a bipartisan issue as criticism of “light touch” regulation of the financial system and the short selling practices of hedge funds came under the spotlight.