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GameStop short squeeze – will it happen again? Investors urged to 'approach with caution'

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GameStop, the American video game retailer, became the unexpected target for collective investor rebellion in recent weeks. In short, large institutional investors and hedge funds in recent months and years bet against GameStop’s share price (known as shorting) in a bid to make a profit.

The idea behind this is that if the share price dropped, these hedge funds would make a profit.

Shorting shares (or stocks as they’re known in America) has been a commonplace element of the investing world for some time but recently, it became the target of certain retail (and much smaller) investors.

Reddit users, specifically those in a sub-group called “WallStreetBets”, decided to buy GameStop shares en masse to raise its price higher and pushback against hedge funds, who were deemed to be too large, powerful and/or corrupt.

The tactic worked, at least in the short-term, as many large investors lost millions as GameStop’s share price skyrocketed (since they were betting the price would go down, they actually lost money as it rose).

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Despite this, many are still wondering if similar action could be on the horizon, either with GameStop again or another target.

Richard Flax, the chief Investment Officer at Moneyfarm, expressed doubt on this: “This type of short squeeze isn’t unusual, and there have been dramatic examples in the past – notably Volkswagen in 2008, which briefly became one of the largest stocks in Europe.

“The alleged conflict between retail investors and large hedge funds is unusual, and seems to have taken on a more existential perspective – rich vs poor, millennials vs boomers.

“This story will end soon, as the reality of the underlying fundamentals rather than market dynamics eventually drives the valuation of these businesses.

“It’s often said that stock markets are voting machines in the short-term and weighing machines in the long. We think that will eventually bear out.

“Typically, periods of unusual market behaviour are a reminder of the importance of having a long-term focus, a well-diversified portfolio, and a structured approach to managing risk. Investors should seek long-term gains rather than quick wins.

“When it’s all over, you’d expect to see three things. First, some soul-searching around risk management at some hedge funds.

“Second, some regulatory scrutiny and investigation – likely regarding questions of market manipulation on all sides. And third, even more attention from institutional investors to sentiment on social media message boards. Stock investors are always on the look-out for new data sources, and shifts in retail sentiment have proven to be important in this case.”

Dan Lane, a senior analyst at Freetrade, shared similar sentiment while issuing a warning for any investors looking to target these elements for profit: “What we’ve seen these last couple of weeks with GameStop has been happening throughout the last year.

“Since the major market sell-off in March 2020, retail investors have flocked to stock markets because they felt (rightly or wrongly) that this dip provided a once in a lifetime buying opportunity.

“Since then, we have seen share prices spike dramatically when any bit of good news hits: whether it was an online retailers’ sales accelerating or an airline or bricks and mortar retail stock rebounding following news of the first successful vaccine trials.

“In the UK, small and micro-cap stocks listed on London’s AIM market are particularly prone to volatility and, as a result, they do tend to be of interest to retail investors. The danger with these, however, is that rallies upwards can quickly and dramatically reverse, leading to substantial losses so retail investors should approach with caution.”

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