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The Reddit Rebellion: Episode 2, ‘The Hedge Fund Strikes Back’

The Reddit Rebellion: Episode 2, ‘The Hedge Fund Strikes Back’

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The last week of January saw the rise of the Reddit Rebellion. A collection of retail investors across the country that sparked massive change in the stock market. Users of gathered together on a popular subreddit R/Wallstreetbets, an online forum which has, as of February 1st, a total of 8.1 million followers. This past week the world saw what can happen when they all invest and work together. Companies like GameStop (GME) and AMC Theaters (AMC) saw huge rises in their stock prices because of the massive social media coverage the two stocks were receiving. The users on R/Wallstreetbets focused their attention and told everyone they should buy, buy, buy. Gamestop stock for example, at its peak, rose to a stock price of 483$ (+%7,000).

The Dark Side to this Rebellion are the Hedge Funds, primarily Melvin Capital. These large ‘hedgies’ saw an opportunity within these companies who were suffering from the COVID-19 Pandemic. They decided to bet against the price going up and short the companies. When the Rebellion arrived they forced the stock prices to skyrocket ‘to the moon’ and forced the Hedge funds to lose billions. Then the Hedge funds subsequently had to turn around and buy more stock to cover as many of their losses as possible. This made the Hedge funds work in favor of the Rebellion and drive the price up even further. By January 29th, Melvin Capital had lost over 3 billion dollars and received influxes of money from Citadel and Point72 to save their position. 

The hedge fund strikes back

The extreme losses and increase of volatility with nearly 20% of the stock market being these retail investors, fueled by social media outlets pouring attention to these individual stocks brokerage firms like Robinhood and Acorns saw their apps and online services being used more than ever. There was so much activity that the company had to put restrictions on buying these now volatile stocks. Restrictions on purchasing these stocks has now brought forth several class action lawsuits to Robinhood for restricting the market. In the closing days of January other, larger, brokerage firms like Fidelity/ and E-Trade also saw restrictions being put in place, and also following were several class action lawsuits.

The restrictions that were in place saw the decline of Gamestops and AMCs stock prices which saw great losses for retail investors. With restrictions in place redditors and social media influencers such as Elon Musk called for everyone to “Hold the Line”. They told everyone not to sell their positions and wait out the restrictions since they were inherently illegal in a free and open market. The Hedge funds fought back with these restrictions as their saving grace to end the volatility, but the Rebellion has ceased to surrender.

Related: Sending the Stock Market ‘To the Moon’

What happens now?

With millions of small retail investors trapped by these illegal restrictions, the Hedge funds seem to be winning the war. However, holding the line might bear fruitful if social media influencers and Redditors gather the same traction as they did before. From here investors can only wait and see what comes from the lawsuits against these brokerage firms that placed restrictions. Scandalously, Robinhood, the brokerage app that now has 13 million users, has also received 275,000 total reviews on the google app store, which have mostly been negative. These negative reviews dropped Robinhood all the way to a one star rating. Google has even gone to lengths to delete these negative reviews in order to save the apps ratings, Robinhood as of February 1 is back up to a 4.3 rating after it received a 1 star rating on Thursday, January 28th. 

While Redditors and retail investors hold the line and Hedge funds press for more power the war is coming to a stand still. While waiting out the storm the debate will rage on within the message boards and on social media whether or not these retail investors should sell their positions and make off with what money they can. We may even see the Rebellion die out all together, or, potentially rise greater than before. The only thing we know for sure is that these retail investors are still already tired from waiting out a Pandemic and their numbers are growing daily with new brokerage accounts being opened faster than ever before. How much more waiting and holding can all of these small time investors endure? These small time investors’ interests in the market have been spiked from all of this attention, if the lawsuits go in favor of the retail investors and restrictions are lifted, we will see a potential second rise in stock prices skyrocketing, which could, hopefully, reach “the moon”. 

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