Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets.
A couple of this month’s trends have been all over the news (hedge funds and retail investing), but Fed communication and increasing interest in SPACs are also worthy of attention. Are you prepared to coach your clients and proactively offer advice related to these trends?
Hedge Funds Get Squeezed
Traditionally, someone buys a stock in the hopes that it will appreciate by the time it’s sold. A number of hedge funds make their money by doing the opposite: essentially betting that a company will go under. This practice is commonly known as short selling, and we saw recent examples of this activity with both GameStop and AMC Entertainment Holdings. But, as we know, this time was different.1
An army of retail investors, created on the popular internet forum, Reddit, rallied around these companies, leading them to increase in stock price over 1,700% in a matter of days. This rapid and unexpected rise led to hedge funds liquidating some of their positions in order to buy stock to pay their obligations on their short bets, essentially getting stung twice.1
As retail investors continue to take market share, institutional investors and the SEC will have to adapt to the changing dynamics.
Learn more about GameStop and the rise of a new generation of investors from the Global Macro Team on the PMC website.
The Rise Of Retail Investing
Close to 8 million brokerage accounts were set up in 2020.3 As the pandemic rages on, and with about half of the workforce staying at home, many people have taken this opportunity to try their hand at trading stocks. Technology has helped accelerate the pace as well. Trading apps, like the recently maligned Robinhood, have become increasingly popular and, for a time, topped the download charts in all of the app stores.2 Demand for these apps is, in part, driven by people new to investing.
Further fueling this rise in retail investing are forums, like the aforementioned Reddit, which allow people to communicate and exchange investment ideas.2 But retail investors are probably here to stay, accounting for one-fifth of the stock volume and likely gaining more share moving forward.3
“Fed-Speak” Is Taking Center Stage
As the policy support provided by the Fed was a key driver for the revival of corporate bond markets after the pandemic-induced brutal sell-off in March 2020, investors are starting to pay more attention to what the Fed communicates after each policy meeting.
In line with broader expectations, the Fed left the policy unchanged and made only minor changes to the Federal Open Market Committee (FOMC) statement following the January meeting. Fed Chair Jerome Powell reiterated his accommodative stance and vowed to maintain the same status until the economy (and not just outlook) improves.4
Bond managers like PIMCO are expecting that the Fed may begin to taper its bond purchases by late 2021. Given the Fed’s assurance, the expectation is that any policy shifts will be well telegraphed to avoid rate and market volatility, which we saw during the 2013 taper tantrum.4 However, given the sharp rally in credit spreads and valuations hovering near historical averages, Fed communication will be increasingly important.
SPACs Having Their Moment In The Sun
Special Purpose Acquisition Companies (SPACs) are not new, but they have recently become more popular as an alternative to the cumbersome IPO process. These publically traded companies are set up by investors, or sponsors, and have no operations or assets. Sponsors generally have an intricate understanding of the industry or sector in which they plan to acquire a privately held company and take it public. SPACs rely on the reputation of the sponsor to attract more investors.5
Beyond star power, the process requires patience. SPACs often don’t announce what company they are targeting to acquire until years after going public. If a target is not acquired, the SPAC is liquidated and the funds are returned to investors. This feature makes it an attractive opportunity, given that it mitigates an investor’s downside risk. With excess liquidity in the market, SPACs have become an increasingly attractive investment opportunity, but understanding how they work is key for investors.5
If you’d like additional information about these themes or have questions, please contact PMC.Research@envestnet.com.
- Juliet Chung, “Wall Street Hedge Funds Stung by Market Turmoil,” Wsj.com, last modified on January 28, 2921, https://www.wsj.com/articles/several-hedge-funds-stung-by-market-turmoil-11611842693.
- Steve Kovach, “Robinhood and other trading apps shoot to the top of app stores,” CNBC.com, last modified on January 29, 2021, https://www.cnbc.com/2021/01/29/robinhood-investment-apps-dominate-app-store-rankings.html.
- Misyrlena Egkolfopoulou and Ben Steverman, “Robinhood Traders Face the Taxman After Falling In Love With Stocks,” Bloomberg.com, published on January 26, 2021, https://www.bloomberg.com/news/articles/2021-01-26/tax-for-trading-stocks-robinhood-investors-confused-over-how-much-they-must-pay.
- Tiffany Wilding, “Avoiding Turbulence: Fed Policy and Communication in 2021,” Global.PIMCO.com, published on January 27, 2021, https://global.pimco.com/en-gbl/insights/blog/avoiding-turbulence-fed-policy-and-communication-in-2021?.
- Martin Daks, “A SPAC is a high-risk but potentially profitable way to get in on the ground floor of a new stock – here’s everything investors need to know,” BusinessInsider.com, published on October 19, 2020, https://www.businessinsider.com/what-is-a-spac?op=1.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
PMC Global Macro Team