In his book The Selfish Gene, controversial evolutionary biologist and modern-day eugenics advocate Richard Dawkins coined a term we all know and love: meme.
Derived from a Greek root word “mimema”—meaning “imitated”—meme, in Dawkin’s initial usage, described genetic mutations by random change that spread via Darwinian selection. This original definition is largely similar to the way netizens use it; internet memes appear at random—and often turn random people into memes, themselves—and spread throughout the world, some reaching farther destinations garnering more staying power than others (Grumpy Cat, anyone?). But Dawkins, in an interview with Wired in 2013, made one distinction: today’s internet memes are deliberately altered by human creativity.
But this is not a semantics lesson, nor a history lesson. Fast-forward to 2021, where memes have become the language of the internet, the online currency before Bitcoin ever was, that can buy one clout at the very least and actual capital at the most. And, if we think back only 12 months ago—it’s been a long year—they even broke the stock market as easily as Kim Kardashian broke the internet.
In January, day traders on Reddit—a site with 52 million daily active users (DAUs), more than 100,000 communities, and 50 billion-plus monthly views—initiated a short squeeze of epic proportions primarily against hedge funds Melvin Capital and Citron Research, which were both shorting the stock of video game retailer GameStop. The play bubbled up, in the public domain, on the subreddit r/WallStreetBets (which hit 1 million subscribers in 2020 and is now up to 11.4 million) over several months prior to GameStop’s all-time high of $483 on January 28.
To put that in context, if you were holding $1,000 in GameStop stock at the start of the year, it was worth roughly $25,000 at the frenzy’s peak. And for contrast, GameStop was trading around $4 per share during the summer of 2020. At the time of writing this (Dec. 28, 2021 at 1:39 p.m. ET), GameStop was trading on the New York Stock Exchange at $149.14, up $0.99. To paraphrase the aforementioned Kim K, “not bad for a
girl stock with no talent.”
At the same time, Apple is trading on Nasdaq for $179.57, down $0.76. Here’s why that’s fascinating to me, WatersTechnology’s (self-proclaimed) most online staff member: almost everyone I know has an iPhone, Mac computer, and/or pair of AirPods, Apple’s wireless headphones, that they use daily. Of course, this is anecdotal, but I don’t know anyone who frequents GameStop, a brick-and-mortar retailer that exists more as a nostalgic concept in the public conscience, rather than a place you actually step foot inside. Like what a Norman Rockwell painting is to last week’s Christmas dinner at your aunt’s. Nevertheless, it persists. Inspiring.
The (ongoing) meme stock saga is emblematic of so many things. First, that the internet is clearly melting our brains, and that two years of pandemic-induced lockdowns and anxiety have done us no favors in that department. But beside that, it’s an absurd, beautiful distillation of the Information Age, which gave rise to more good information, but also misinformation and disinformation, and some quasi-type-of-information that somehow encompasses all three in one horrible, little package. Which brings us to the central dilemma (for you, a WatersTechnology reader, anyway): how do you reconcile your good investment sense—acquired through years, (decades, perhaps) of trading floor meltdowns, fancy networking dinners, and some internal scoreboard of wins and losses—and the information now at your disposal with each other?
Have we pretty much accepted that alternative data isn’t so much “alternative” in a fringe sense, but alternative to market data and equally as mainstream? Yes? Good. Credit card transactions, mobile location data, satellite imagery, social media sentiment, product reviews, weather data, ESG—these types of datasets guided firms, such as UBS and Unigestion, through the early months of the pandemic, a period of volatility so great it nearly matched the Crash of 1929.
Though evidently useful in black swan events, such datasets aren’t hugely interesting anymore as far as the cutting edge is concerned, though they still cost the buy side millions of dollars every year in the hope that somewhere in the rough lies a diamond in the form of untapped alpha. Or, at the very least, they make a strong second line of defense when all goes to hell (See: “The new data” box, below). Millions more are spent on artificial intelligence and machine-learning models to dissect the oceans of data, to meticulously turn over each stone, to make correlations that a human analyst can easily miss. But do they understand? As the tides have turned—and they’ve done so swiftly—have they adapted?
Allow me a bold claim: the machine-learning models that fund managers and fintech vendors started training up, say, five-ish years ago no longer hold up. My evidence is two-fold and half-anecdotal. First, I could hardly keep up with the world over the past five years. Did I think a former reality TV star famous for the phrase “You’re fired!” would be given the nuclear launch codes? No. (And let’s not forget the data science and algorithms that backed me up on this.) Did I think that a not-insignificant portion of the electorate would come to believe the world is run by a cabal of child-eating, blood-sucking movie stars and politicians, and say so out loud? Again, did not see that coming.
I also did not anticipate—and if you were unsurprised by the two examples above, maybe this at least made you gasp—that over a handful of months, an online community of 1 million people (at the time) would concoct a plan completely in the public domain to massively upend some billion-dollar hedge funds—and succeed. Citron Research was forced to close out its short positions on GameStop at a 100% loss and has ceased publication of its short-selling research reports, while Melvin Capital closed out January with a 53% loss overall, prompting fellow hedge funds Citadel and Point72 Asset Management to throw a combined financial lifeline of $2.75 billion in cash.
From where I’m sitting, there can only be two reasons why such a shitshow ensued. Hedge funds, including those who might have joined the day traders and profited big, either didn’t know what was unfolding, or didn’t take it seriously.
Let’s assume they missed it completely. As we’ve noted, social media sentiment is a widely used mechanism in quantitative research and investing. Reddit, which recently filed to go public, is a large social media platform, albeit not on the same scale as Facebook (1.93 billion DAUs), Twitter (211 million DAUs), YouTube (315.12 million DAUs), or Instagram (500 million DAUs). Perhaps your average machine-learning model on Wall Street were only focused on these Big Guys, which would be valid for resource and time reasons.
But we know that the short squeeze plot was not solely relegated to Reddit. Keith Gill, a former financial investor at MassMutual who was fired in January, was a central figure in the drama under the Reddit username DeepFuckingValue and his YouTube channel as Roaring Kitty. It also stands to reason that many of these Redditors doubled as Twitter and Facebook users, and presumably also communicated there, only in a more decentralized fashion than Reddit’s community-based model of subreddits would foster. But it was still there.
Which brings me to the second scenario, which I think is more likely: the institutional investors didn’t take the information—or the Redditors themselves—seriously. That’s negligent at best, and reckless at worst.
The Book of Genesis
What we’re really talking about here—what I’m really talking about, anyway—is the changing nature of information. What do we consider a credible source? How do we know who and what to trust? What information is factual, timely, and important? Does it need to check all three boxes? How often is a baby thrown out with its bathwater? The GameStop/Reddit saga is a microcosm of philosophical debate that’s been playing out since the ’90s with the advent of the World Wide Web. As long as humans stick around, it may never stop playing out.
When I reported my first piece on the intersection of alternative data, GameStop, and Reddit in March, my main takeaway was that humans—and thereby, the machines they program—would need to wrestle with the reality that there is no stark divide anymore between what happens online and in real life. That would mean having to reconsider the information that we previously deemed irrelevant—maybe, for example, a bunch of day traders scheming to take down some hedge funds and make millions while doing it—or the truly insane, such as rumblings for weeks that the US Capitol would be overtaken by MAGA enthusiasts and QAnon believers, which proved to be a serious threat on January 6.
In that story, Chris White, CEO of bond pricing platform BondCliq, asked me whether I thought humans have ever really understood the world around them. In other words, was I sounding the alarm on an ancient problem, one that humans had perhaps already resigned themselves to not solving?
“I think that chaos has been the norm. I think what you’re seeing is communication changing states, like the way that water goes from ice to liquid to gas. You’re seeing it literally change states, in which now the communication that we rely on to interpret the world has moved into a new medium. And actually any time there’s ever been meaningful innovation in communication—where all human beings can communicate at the same time—you get a massive shift in culture,” he told me.
Take, for example, when German theologian Martin Luther translated the Bible, previously only found in Latin, to German in the early 1500s. Thanks to the growth of the printing press at the time, the new text was disseminated quickly among other Germans, allowing them to interpret scripture in their own ways. When Luther, according to lore, nailed his 95 Theses to the doors of Catholic churches in Wittenberg, it would jumpstart the Protestant Reformation, a decades-long rejection of the church that resulted in division between Roman Catholicism and several new Christian sects that still exist today.
A time-honored tradition of the human experience is that rebellions and reckonings come and go, and certainly for the people who live through them, it can feel like the rug has been pulled out from under them. For everyone who comes after, it’s just a page in a history book.
As topics such as media literacy, digital ethics, AI ethics, and digital curation become urgently needed in an increasingly digital world, some are recognizing that as much as institutions are buyers and sellers of securities, they’re fundamentally more like us—buyers and sellers of information.
I’m not here to solve any riddles—merely to spout them like some evil, crotchety gnome—but I do think I see the forest for the trees. The internet informs the world, perhaps more than the world informs the internet. I, for one, am not looking forward to living in the metaverse, where evil, crotchety gnomes are likely unwelcome. But this is its genesis, and that means that maybe we’ll get to be featured on one of those history book pages I mentioned, which would be cool. I know how I’ll be remembered: smashing all the VR headsets that I possibly can, before riding off into the virtual sunset, in the backseat of a virtual cop car.
The new data
Apart from baseball, apple pie, and Chevrolet, there’s little as American as the right to profit off panic and hysteria. At the sinister end of the spectrum, you have those who bought up hand sanitizer en masse at the start of the Covid-19 pandemic and price gouged the hell out of Purell. Weapons contractors who made big bucks—and continue to—post 9/11. This dismal article that serves as a how-to for profiting off catastrophe.
Much more benignly, but infused with the same capitalist spirit, are the innovators—those who see a new opportunity and offer up a price-tagged solution to fill the space.
This year, some data providers launched new datasets and products that cover retail trading behavior and meme stocks, specifically. Among them were Thinknum and InsiderScore, as well as hedge fund consultancy Pivotal Path, while others such as Quandl were cautiously “experimenting,” and S&P Capital IQ was staying out of it.
In the wake of meme stock frenzy, Thinknum moved to meet the surging demand for data and insights on the companies that land within Reddit users’ bullseye, and on the Redditors themselves. The company began by tracking the 100 most popular tickers on top Reddit forums such as r/WallStreetBets and screening for specific mentions of company names. The methodology is distinct from Thinknum’s coverage of other social media forums like Twitter, where the vendor focuses on metrics like follower counts, Graham Gilliam, Thinknum’s growth marketer, told WatersTechnology in June.
Ben Silverman, director of research at Verity—formerly of InsiderScore, which merged with MackeyRMS to create the rebranded entity—created a custom add-on to one of the company’s flagship offerings, its database of analyzed 13F filings, to garner risk management capabilities related to meme stock exposures.
The US Securities and Exchange Commission (SEC) requires investment managers with at least $100 million in assets under management to disclose their equities holdings in 13F forms quarterly. Verity took its 13F database and overlaid it with what it calls the “fundamental hedge fund group,” the pool of US long-short hedge funds that have roughly 10 to 300 holdings. The parameter mostly eliminates large hedge funds and quants. Then the company seeks out overhangs caused by large positions on a certain stock.
“When there’s a large put position like that, it’s a recipe for a short-squeeze. So if you’re short the stock, you want to be aware of that,” Silverman said. “There’s obviously an inherent danger—especially with these [meme] stocks—of not just one short-squeeze, but multiple short-squeezes.”
And Pivotal Path, a hedge fund consultancy that 2,300 hedge funds across 40 strategy types, created its Meme Stock Basket to systematically track hedge fund exposure to this risk factor. As of mid-2021, the basket included 15 of the most cited stocks on Reddit, including GameStop; AMC; BlackBerry; Bed, Bath & Beyond; and Nokia. The company then analyzed whether these positions could have further repercussions across the hedge fund industry. In evaluating more than 1,000 institutional-grade hedge funds, it had found that the vast majority of hedge funds are not exposed to this risk factor—meme stocks—in any statistically significant way.
According to PivotalPath’s analysis, these hedge funds’ average correlation and beta to the risk factor is near zero, even when adjusted for volatility and even when the company adjusted the analysis over 6, 12, and 18 months.
“The punchline is: It’s very contained. Are people thinking about it? Are they aware of it? Are they trying to stay informed? Yes. But outside of a few of the big names that we heard about in January … it’s pretty darn isolated,” said Jon Caplis, PivotalPath’s founder and CEO.
Though PivotalPath found the risks stemming from meme stocks to be isolated—though GameStop is still trading at $150 per share—the SEC has yet to act on the ordeal nearly a year later. In October, it issued a 45-page summary of January’s events, but industry observers anticipated more, according to the New York Times. Should the day traders decide to target a new stock—or a new hedge fund—as early as tomorrow, the Commission is leaving the door open for them—for the rest of 2021, at least.
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