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This time, however, the scheme is running on steroids, with applications such as TikTok and Reddit making it possible to reach millions of people almost instantaneously. While they are manipulating the typical desire to get rich quick, the move is also taking advantage of the pandemic, with a plethora of young people suddenly finding themselves with more time on their hands and government stimulus cheques and free-and-easy access to trading applications like Robinhood.
This has even been carried into the options market, where last Wednesday more than 38 million call options traded, the most ever recorded in one day.
If you happen to have a U.S. long-short fund in your portfolio you may want to check in to see how they are navigating this environment
The difference from the pump and dumps from the past is that they are targeting poorly run companies with large short positions on them so that when they rally it causes forced coverings resulting in a huge spike in the share price. Interestingly, we wonder if it all started with Tesla which rocketed in part due to the massive short-covering that cost sellers more than $40 billion in losses last year.
Overall, this strategy has been so successful that Goldman Sachs’ 50 most heavily shorted stocks are up an astounding 80 per cent in the past 12 months.
All of this is wreaking havoc on hedge funds and so if you happen to have a U.S. long-short fund in your portfolio you may want to check in to see how they are navigating this environment. The problem with short selling is that the downside is unlimited unless some risk controls are put in place. Therefore, times like these will weed out the good managers from the bad.
