Sharp gains in the prices of so-called meme stocks – shares that have achieved viral popularity due to social media – have punished a number of institutional short-sellers over the past 18 months or so. That has prompted a revolution in institutional investor behaviour, with many avoiding shorting stocks and paying increasing attention to social chatter on popular retail-focused sites.
‘If you can’t beat them…’: why institutions eye retail trends
How ‘Eat the Rich’ galvanised a change in hedge-fund analysis
For a brief period in early 2021, individual investors – many of them followers of a popular Reddit page – piled into trades around several companies, such as GameStop, pushing their stock prices to stratospheric levels. Short-selling hedge funds were caught out – Melvin Capital, one of Wall Street’s elite hedge funds, had to be bailed out by two other firms. The Reddit GameStop coup captured the public imagination – Netflix even made a documentary about the phenomenon, called ‘Eat the Rich’.
The meme-stock craze may now be over. That’s partly because hedge funds have changed their behaviour as a direct result of the trend. Few are willing to aggressively short stocks and expose themselves to another attack by organised retail investors.
And it’s not just US investors they need to be aware of. Indian retail investors bought stakes in most of the companies in the Adani Group in March. The Indian conglomerate’s share price plunged following allegations of accounting fraud and share-price manipulation made by the US short-seller Hindenburg Research in late January. 1
Institutional investors have now started following retail investors on social media to ensure that they don’t take another hit from meme-stock plays. Indeed, according to Brunswick Group’s Digital Investor Survey 2023, 58% of institutional investors have made an investment decision based on information they found on Reddit. 2
The same survey found that 88% of institutional investors had made a recommendation or decision based on information from digital or social media. Bloomberg has quoted Chris Berthe, JPMorgan’s global co-head of cash equities trading, as saying, ‘If you don’t have a clear view of what retail is up to, it feels like you’re driving partially blind.’ 3
Figure 1: Favoured sources of information used by institutional investors, 2023
Institutional investment firms have also hired social media managers and subscribed to services that monitor social chatter. JPMorgan, for example, has launched a new tool called ‘Through the Retail Lens’, which tracks social media activity and predicts short-squeeze opportunities. Bloomberg reported JPMorgan as saying that it hoped the tool would help drive trade ideas for clients and that some quant funds had shown interest in incorporating the product into their models to enhance alphas.
Moreover, the focus isn’t just on meme stocks but on retail behaviour more generally. During the Black Friday sell-off in November 2021, for example, retail investors were big buyers and ‘that was a real source of interest for our clients’, according to JPMorgan. That’s the kind of signal that billion-plus-dollar funds actively seek, explained Bloomberg’s article.
Clues as to the behaviour of retail investors are increasingly important because those investors represent a growing share of the overall market. They accounted for 23% of the US stock market in early February, surpassing even the pandemic-fuelled trading frenzy, when bored investors flush with cash decided to take on the institutions.
However, according to JPMorgan, the behaviour of retail investors has changed since the pandemic. While retail volume remains concentrated in smaller stocks, they are accounting for an increasing percentage of total trading volume for large-cap stocks. Moreover, retail investors appear less keen now on options trades, with these high-risk, high-reward trades accounting for about 12% of all trades in early February, down from a 17% share in early 2021. 4
1 https://economictimes.indiatimes.com/markets/stocks/news/adani-rout-has-retail-investors-snapping-up-groups-stocks/articleshow/99397621.cms
2 https://www.brunswickgroup.com/media/10867/brunswick-digital-investor-survey-2023-summary.pdf
3 https://www.bloomberg.com/news/articles/2021-12-09/jpmorgan-offers-hedge-funds-a-way-to-dodge-meme-stock-shocks
4 https://www.forbes.com/sites/dereksaul/2023/02/03/retail-trading-just-hit-an-all-time-high-heres-what-stocks-are-the-most-popular/?sh=1b2785eb6664
Publication date:
The information in this presentation does not contain (and should not be construed as containing) personal financial or investment advice or other recommendation, or an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently, any person acting on it does so entirely at his or her own risk. The information does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. IG Australia Pty Ltd ABN 93 096 585 410, AFSL 515106.
Contact us
Let us create a solution tailored for your needs. Get in touch with our Australian-based team by phone or email to discuss your objectives, or request a brochure.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You do not own or have any interest in the underlying asset. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Please consider the Margin Trading Product Disclosure Statement (PDS), Risk Disclosure Notice and Target Market Determination before entering into any CFD transaction with us.
The value of shares, ETFs and ETCs bought through an IG share trading account can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.
Please ensure you fully understand the risks and take care to manage your exposure.
The information on this website is prepared without considering your objectives, financial situation or needs. Consequently, you should consider the information in light of your objectives, financial situation and needs.
This website is operated by IG Australia Pty Ltd. IG Australia Pty Ltd is located on Level 32, Queen & Collins, 376-390 Collins Street, Melbourne, VIC 3000. ABN 93 096 585 410, Australian Financial Services Licence No. 515106. Derivatives Issuer Licence in New Zealand FSP No. 684191, NZBN 9429047618251.
The information on this site is not directed at residents of the United States or any particular country outside Australia or New Zealand and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.