Posted inAnalysis

The long and the Big Short of it

Investors and money people are never the heroes in a good story. Gordon Gekko of Wall Street, released in 1987, was never supposed to be a hero despite becoming one to those who missed out on the irony.

Patrick Bateman of American Psycho was never going to be an actuary. There is a reason that Leonardo DiCaprio/Jordan Belfort was called ‘the wolf’ in The Wolf of Wall Street. The TV series The Deuce, which is bereft of—save one or two—good guys made its most reprehensible character a stockbroker.

Even the film version of The Big Short, a movie set entirely in the world of money, never bothered to offer up a good guy. Watch it and you become aware of how all the characters really exist on a sliding scale of, if not evil, then a sort of sociopathic moral corruption. The rebels of the film, the guys from Brownfield Capital, are shocked when given a harsh lesson by fellow investor Ben Rickert on the consequences of their actions.

“If we’re right, people lose homes,” the character played by Brad Pitt says, “People lose jobs. People lose retirement savings, people lose pensions. You know what I hate about banking? It reduces people to numbers. Here’s a number – every 1% unemployment goes up, 40,000 people die. Did you know that?”

The financial crash of 2008 did nothing to make financiers appealing to the general public, given that most blame the financial meltdown on the gambling of big banks, who had been crying out for deregulation, that then ran to various governments in order to be bailed out while people lost pensions and homes.

Double-digit percent losses

This brings us to this week. It has been reported widely that White Square Capital, having abutted up against Gamestop investors, has announced that it is to close its main fund and return capital to investors.

As the Financial Times reported: “White Square, which at its peak managed about $440m in assets, had bet against GameStop, say people familiar with its positioning, and suffered double-digit percent losses in January.”

There is never a shortage of righteous anger in the world, nor mobs willing to express it, so going up against GameStop investors seems like a foolhardy thing to do.

White Square Capital was not the only financial firm to take a shellacking from the GameStop story. As the FT also reported: “[GameStop] led to big losses for some funds, including US-based Melvin Capital, run by Steve Cohen protégé Gabe Plotkin, and Light Street Capital, run by Glen Kacher, a former Tiger cub who worked at Julian Robertson’s Tiger Management.”

The problem for White Square Capital is that they are so far the only hedge fund that has gone to the wall because of it.

Two can play that game

The GameStop story is complicated to the common man (for the finer details of it, the BBC made this handy pointed video), but it is an age-old story. The general public were angry at elites who profited from the misery of others, and they sought to beat them fairly at their own game.

All of this was made possible by apps that allowed individuals to place the same sort of financial bets that institutions were making, allied with a populist Reddit movement that both informed and inspired people to be part of a movement.

You are no longer invulnerable, the movement seemed to say, and you are certainly not invincible.

As Annabel Smith wrote on The Trade: “The events that took place involved stocks such as GameStop and AMC Entertainment in what is considered one of the first social media driven and coordinated buying regimes by retail investors. It resulted in market conditions likened to the bubble around the turn of the century, leading to concerns that institutional investors must now adapt their risk models to mitigate the possibility of this happening again.”

Keyboard cowboys

We live in a world of public shaming, where an errant tweet or post or thought can be seized upon by thousands, most with no connection to the real events. This maelstrom of activism, done from behind a keyboard, has now shown itself to be brutally effective at turning markets.

This has a pretty chilling-but-effective message for funds and those that invest in them: You need to be seen to have your house in order.

But here’s the thing: investors do care about where their money goes. At Expert Investor, one of the most-read parts of our site is the ESG section. As I reported last week, more than half of inflows into Luxembourg last year headed into sustainable funds. As a sector of this market, ESG investing is growing so rapidly that even the torpid UK government is looking more and more at this space.

At some point, all this will abut up against this new kind of activism. Even the most ethical investors must be able to see that whatever came for GameStop can also come for them.

The best thing in going forwards is for funds to put their best foot forwards, to show the world at large that they are more than money-grabbing vampires, psychopaths and sociopaths out to squeeze every last drip of profit. They need to show that they are not just pensions, but retirements, and savings plans for children, and ways for governments to fund infrastructure and schools.

The problems that funds will have going forwards will not only include how they manage money, but how virtuous they can look when doing so.

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

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