Retail investors are amateurs in a high-stakes market: they cannot win
News of the demise of the hedge fund-dominated financial markets - in the face of GameStop citizen shareholder power - was wildly exaggerated, according to Oxford Professor Bige Kahraman.
In fact, says the professor of finance at the Saïd Business School, far from small shareholders taking the fusty old hedge funds to the cleaners, as they drove up the price of GameStop shares by 145% in one day, some hedge funds were winners all along.
While some were shorting the shares, anticipating the failure of the video game retailer, others hitched a ride on the citizen shareholder bubble and helped to drive up the share price. Some hedge funds, says Professor Kahraman, could have ‘hedged’ and been on both sides of the wicket. Kerching. But then, that is what hedge funds do.
Some hedge funds could have ‘hedged’ and been on both sides of the wicket....Kerching. But then, that is what hedge funds do.
‘There is a misconception,’ says Professor Kahraman. ‘That the price going up was solely due to small investors. Hedge funds are good at riding bubbles...The dramatic movement was not only due to small investors but hedge funds identified and then rode the bubble all the way as the price went up and then sold.’
‘Small investors,’ she says ruefully. ‘Are always going to lose money...private investors will have been a relatively small fraction of the bubble.’
Small investors are always going to lose money...private investors will have been a relatively small fraction of the [GameStop] bubble
Professor Bige Kahraman
Professor Kahraman adds, ‘They were exploited not only because big investors are exploitative, but also because, even in a perfect market, they cannot compete with informed, sophisticated traders.’
According to Professor Kahraman, academic experts consistently advise private investors not to invest in individual shares, ‘Retail investors will always lose money because they lack the ‘education’ whereas financial professionals are well informed – that’s what they do.’
She maintains, ‘It would be far more advisable for small investors to put their money into index funds, which are managed by professional asset managers.’
‘People get misconceptions that they know something and can beat the index,’ she says.
Professor Kahraman insists it was wrong for the digital retail trading platforms to stop small investors trading, while large investors were permitted to unwind their deals.
‘It could have been a problem with operational hurdles,’ she says. ‘But a more malign view would argue that it was pressure from hedge funds.’
But, she says, she is ‘alarmed’ by the interest in digital share trading platforms, which encourage small investors to trade shares, ‘It is exactly what we caution against – gambling as a form of investment in the stock market. It’s very dangerous. There is consensus among academics that this is a bad thing. Retail investors end up losing money.’
It is exactly what we caution against – gambling as a form of investment in the stock market. It’s very dangerous...Retail investors end up losing money
Professor Kahraman encourages small shareholders and maintains that the ‘stock market is not risk-free’, but they are much safer to invest in collective investments and holding for a longer period.