Sezer Sherif, founder and CEO of investment group Vector Capital, outlines the role of hedge funds and their role in the market.

GameStop Corp is an ailing Fortune 500 company, headquartered in the US, that offers a range of games and entertainment products across ten countries. In January, the company was embroiled in what was widely reported to be a “David and Goliath” battle between large hedge funds and small investors.

This was because the price of the company’s share suddenly and unexpectedly started to skyrocket in value, defying the exceptions of Wall Street traders. They had sought to make a profit by selling large volumes of the company’s shares in order to push their share value down. These “short-sellers” would then bet on a decline by selling borrowed shares in the hope of repaying at a lower price.

Unfortunately for them, investors from the Reddit forum Wall Street Bets saw the opportunity to buy the shares at a bargain price and started a campaign to push them back up again. The result was billions lost by some major players on the stock market and a few Wall Street Bets users becoming millionaires. Regrettably many amateur investors, not heeding professional advice and caught up in the media excitement, bought GameStop shares just before they crashed, which resulted in them losing their hard-earned savings.

The takeaway from this event is that investing in the stock market can be an enjoyable and a profitable experience, but only when performed correctly. Those attracted by the GameStop hype or wanting to become the next “Wolf of Wall Street" will quickly become undone, or fail to take more suitable opportunities, if they do not take the time to fully understand what they are getting into.

What is a hedge fund?

At its simplest, a hedge fund is simply a way to invest in the stock market with the aim to create money for its creators and investors. They are regulated by the Financial Conduct Authority (FCA).

UK hedge fund managers are required under the Financial Services and Markets Act 2000 to gain approval to establish a new fund. They must also demonstrate adequate financial resources and appropriate staff, systems, and controls to manage the fund.

At its simplest, a hedge fund is simply a way to invest in the stock market with the aim to create money for its creators and investors.

Once approved, a hedge fund manager will invite investors to pool their money in order to fund one large portfolio in accordance with their set strategy, which is then spread across many investments. Whether that be real estate or emerging markets such as the BRIC economics – Brazil, Russia, India, and China.

This minimises risk and is also a lot simpler than buying shares individually or directly from a company. Investor returns are typically generated as dividends or interest distributions. In return the hedge fund managers will receive a performance fee, which can be as much as 20% of the fund’s profits.

How do they work?

It is commonly accepted that Alfred W. Jones is the father of the hedge fund industry. While working at Fortune magazine, Jones wrote an article titled “Fashions in Forecasting” (FIF) in which he had an insight that that would make investing more profitable and less risky. This is achieved by “hedging”.

There are many different types of hedge funds and their managers invest according to different goals and strategies. They are similar, though, in their desire to make money in spite of market fluctuations. They achieve this by holding both long and short stocks.

Imagine the fictional IT company, the Acme Corporation, invents a quantum computing chip that will vastly increase computing power as we know it. This will likely mean its share value will increase while that of its nearest and less innovative competitor will drop. A textbook hedging strategy by a hedge fund manager would be to go long on the Acme Corporation, while shorting its rival, with investments of the same value.

If the value of the IT industry increases, you will generate a return on your investment in the Acme Corporation that should outweigh the loss of having invested in the competitor. Alternatively if the IT industry goes down in value you would lose money from Acme Corporation but make it from its competitor.

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By hedging both sides, a hedge fund manager can insure against risk but at the cost of greater profit.

What do they offer to consumers?

Investing in a hedge fund led by a highly experienced and performing hedge fund manager can deliver some excellent returns on your initial investment but you may be exposed to greater levels of risk than other means of investment.

Remember that hedge funds are typically utilised by large companies, but high net-worth individuals can and do invest in them. Unfortunately, the sums required are often beyond the means of the average retail investor. The alternative is for them to invest in a “fund of funds”. This is a fund that invests in other mutual funds or hedge funds and provides retailers with the advantages associated with broad diversification at minimal risk. They are also a great way to access to an investment vehicle that might not have otherwise been accessible. For the privilege though, there is typically an additional layer of fees to be paid.

Before you invest in a hedge fund, you must make sure you are prepared and suitable (financially) for the venture. Due to the large role they play in managing your money, you also want to make sure any hedge fund manager is qualified to do so. Finally, always read through their sales literature so you understand the nature of the risks and returns you may receive. If you are in any doubt if the fund is suitable for you then seek independent financial advice.

An independent survey of more than 900 UK-based investors commissioned by broker HYCM has investigated which assets the traders plan to buy or sell in the coming year.

Among its findings, the survey revealed the most popular avenues for UK investors to place their money. 70% of respondents had put their money into cash savings, while 40% invested in stocks and shares and a further 38% invested in property.

The survey also asked investors about their investment plans for the new year. 38% of all respondents said they would be putting more money into their savings accounts, while 27% planned to purchase more stock and 21% planned to invest in property.

Conversely, the survey found that the least popular asset classes among UK investors were cryptocurrencies, forex and classic cars, which were respectively favoured by only 21%, 20% and 19% of respondents. However, 18% planned to invest in cryptocurrency during 2021.

Also noteworthy was investors’ overall optimism in their strategies. Although 39% of respondents said that their finance and investment outlooks were radically changed by the COVID-19 pandemic, a full 72% were confident in the way they were managing their portfolios in the current climate, and 53% were confident of being in a stronger position once the pandemic ended.

Giles Coghlan, HYCM’s Chief Currency Analyst, remarked that the findings of the new survey were notably similar to those seen at the beginning of the pandemic.

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“While fiscal and monetary stimulus have been positively received by the market, investors are still treading carefully,” he said. “This is why cash remains king, despite interest rates being at record lows.”

Tesla, the world’s highest-valued automotive company, bought around $1.5 billion worth of Bitcoin in January and signalled its intent to start accepting the cryptocurrency as a form of payment.

In a securities filing on Monday, Tesla said it had “updated its investment policy” and was looking to invest in “reserve assets” such as gold, digital currencies o gold exchange-traded funds. The company also said that it had purchased $1.5 billion worth of Bitcoin and could “acquire and hold digital assets from time to time or long-term".

"Moreover, we expect to begin accepting Bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis," Tesla continued.

The news promptly caused the price of Bitcoin to surge 14% to a record high of $43,968 per token.

Tesla’s move into Bitcoin represents a significant milestone in the cryptocurrency’s uptake among businesses. While some financial institutions, including PayPal, have moved to adopt the currency as an accepted form of payment, Tesla is the highest-profile non-financial company to invest heavily in it.

With Tesla’s cash and cash equivalents coming to around $19 billion at the end of 2020, its new Bitcoin investment is also a significant move for the company itself.

The development comes on the back of comments from Tesla CEO Elon Musk, who stated that Bitcoin was “on the verge” of becoming more accepted among investors.

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“I was a little slow on the uptake,” he said in a chat on the social media app Clubhouse, adding that he should have bought into Bitcoin eight years ago.

Musk has also recently become one of the principal drivers behind the dogecoin cryptocurrency, with his “joke” comments about the digital token raising its market value by over 800%.

Dogecoin has surged after Elon Musk and other celebrities appeared to endorse the joke token on Twitter.

The meme-inspired cryptocurrency rallied 65% in 24 hours to reach a peak of $0.0844 on Sunday evening before falling back. It regained 19% during Monday morning trading in London, reaching $0.0704.

Dogecoin’s market value reached $10.7 billion at its highest point on Sunday, becoming the tenth most valuable digital coin on CoinMarketCap’s ranking.

Dogecoin was created in 2013 based on the “doge” meme which depicts a Shiba Inu dog alongside captioned text in Comic Sans font.

The currency’s all-time high came alongside renewed attention from Twitter influencers. On Saturday, rapper Snoop Dogg tweeted a picture of one of his album covers edited to replace his face with the dogecoin Shiba Inu, captioned “Snoop Doge”. He tagged Elon Musk in the post.

Musk himself has emerged as a significant dogecoin booster, sending the price soaring with successive tweets about the currency. His late January tweet of an altered Vogue cover entitled Dogue led to an 800% jump in the price of dogecoin.

Musk has publicly said that his “endorsements” of dogecoin are meant as a joke, but his continued tweets have helped to raise the profile of the cryptocurrency and repeatedly boost its value.

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The spotlight thrown on dogecoin by Snoop Dogg and Musk has attracted other celebrity endorsements to the cryptocurrency. KISS singer and bassist Gene Simmons tweeted last week that he had “bought a big position in Dogecoin” and further promoted the cryptocurrency to his followers.

With Wall Street hedge funds’ practice of short-selling stocks coming into focus as one of the causes of the GameStop craze, those interested in following the story will want to know the basics of the strategy and how it is used to make money by identifying companies in decline.

At its core, short-selling is a simple (if risky) process which beginner investors may want to steer clear of until they have grown more experienced at identifying market trends.

The Concept

Short-sellers take the “buy low, sell high” mantra of regular trading in reverse. They first identify a stock or other asset that they expect will decrease in value down the line. They then borrow shares of this stock from a brokerage and immediately sell them to another investor willing to pay the market price. These borrowed shares must be returned by the expiration date of the brokerage’s loan.

The trader in this instance is hoping that the price of the shares in question will go down after they have been sold, allowing them to purchase them back at a lower price. The difference between the initial sale and the buyback makes up the short-seller’s profit – or loss.

In a hypothetical scenario, a trader could believe that XYZ Company stock is overvalued at $100 and decide to bank on its price going down. They borrow 100 shares and sell them for $10,000, becoming “short” 100 shares, and wait. A week later, reports of XYZ’s poor performance begin to spread, and its stock deteriorates to $50. At this point the trader buys 100 shares back and returns them to the lender.

Ignoring possible costs associated with the short position (as explored below), the trader in this case would gain $5,000 from buying their shares back at half the price for which they initially sold them.

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There are some technical factors involved with short-selling to consider too. Opening a short position requires a trader to have a margin account; different brokers will have their own set of qualifications an account must meet before they allow margin trading. Traders will also likely pay interest on the value of their borrowed shares while their position remains open, and may of course need to pay a commission fee depending on their choice of brokerage.

The Risk

Short-selling is fundamentally different from standard equity trades. When you buy stock with the expectation of selling it higher, but the price doesn’t go the way you expected, the maximum loss you will make is equal to the value of the stock you purchased.

This is not the case when you bet for the stock’s price to go down. As there is no limit to how high a stock’s value may rise, you stand to make technically infinite losses should you misjudge your position. While large financial organisations may be able to cover such losses through other avenues, smaller investors can and have gone bankrupt by placing short positions on stocks that then ballooned, which is why most traders are advised to avoid them – or at least not to concentrate in them.

Some investors also see an ethical issue with short-selling stocks, as it carries the perception of “betting against the home team”. While shorting itself does not necessarily damage a company, and some economists argue it can provide liquidity and drive down overpriced securities, a more harmful variant of the practice involves traders taking a short position before spreading malicious disinformation about a company to drive its stock down. This “short and distort” tactic has grown in usage as social media has made it easier for investors to communicate and share stock tips.

It is unclear whether the firms that recently shorted GameStop did so maliciously, though Citron Research – one of the hedge funds at the heart of the craze – has now pivoted away from publishing “short reports” altogether following trader backlash to the practice, focusing instead on long position opportunities.

Deutsche Bank AG closed 2020 with an annual profit for the first time in six years, owed in large part to a bond trading boom and having achieved cost-cutting targets.

For the full year, the bank made a profit of €624 million, up significantly from its net loss of €5.26 billion in 2019 as it underwent a major restructuring project. Analysts had expected to see a loss of €201 million, according to Refinitiv.

Profits were spurred on by Deutsche’s investment banking division, with net revenues rising 32% to €9.8 billion over the course of the year as trading in fixed income securities and currencies jumped 28%. The bank stated that this increase “more than offset a rise in provision for credit losses resulting from COVID-19.”

By contrast, Deutsche’s private banking and corporate banking divisions saw almost flat revenues in 2020, and asset management revenues fell 4%.

"In the most important year of our transformation, we were able to more than offset transformation-related effects and elevated credit provisions - despite the global pandemic,” Deutsche Bank CEO Christian Sewing said in the Q4 report.

"We are confident this overall positive trend will continue in 2021 despite these challenging times.”

Deutsche Bank’s years-long journey back to profitability has not been smooth, having faced allegations of money-laundering and received a $2.5 billion fine for the fixing of LIBOR. It has also recently been caught up in the Wirecard scandal.

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The bank also announced 18,000 job cuts in 2019 as part of a plan to reduce the size of its investment bank, which is now the main driver of its profits.

US Treasury Secretary Janet Yellen is calling a meeting of several key financial regulators this week to discuss market volatility driven by retail trading in GameStop and other equities favoured by online investors.

Yellen will convene the heads of the Securities and Exchange Commission (SEC), the Federal Reserve, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission, Reuters first reported on Tuesday.

Yellen sought a waiver from ethics lawyers prior to calling the meeting, according to a document seen by Reuters. Her decision to seek permission follows reports that she received $700,000 in speaking fees by hedge fund Citadel, a key player in the GameStop saga, potentially creating a sticking point for Yellen.

A Treasury official, who declined to be named by Reuters, said the meeting would be held this week, potentially as early as Thursday.

“Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” said Treasury spokesperson Alexandra LaManna in a statement to Reuters.

The move by Yellen follows a week of unprecedented market volatility as retail investors piled into stocks that had been targeted by short-sellers. Brick-and-mortar video game retailer GameStop saw the most trading activity, with its stock price rising more than 1,600% from its state at the beginning of the year, though other struggling outlets including AMC, BlackBerry and Bed Bath & Beyond were also affected.

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The investors’ coordinated push against short-sellers cost hedge funds billions of dollars, with the resulting volatility causing Robinhood to restrict purchases of the focal stocks – a move which also caught the attention of lawmakers, who subsequently called for an investigation into the platform.

Silver soared as much as 11.2% to $30.03 an ounce during weekend trading, its highest level since February 2013, as a wave of small-time traders turned their attention to commodities.

Silver is only the latest asset to see a surge following the GameStop frenzy, where users in the Reddit community r/WallStreetBets piled into GameStop and other struggling retail businesses that banks and hedge funds had taken out paper bets against.

The commodity first came to the attention of the online group on Thursday when posts began circulating urging investors to buy silver mining stocks and ETFs backed by physical silver bars in another squeeze of short-sellers in the market. Demand for physical silver has more than doubled since then.

With value as both a safe-haven asset and an industrial metal, silver prices have risen by almost 19% since Thursday.

iShares Silver Trust ETf, the largest silver-backed exchange-traded fund, saw its silver holdings jump by a record 37 million shares between Thursday and Friday. Each share represents an ounce of silver. Total silver holdings by all major ETFs reached a record 912 million ounces during the week, up from just over 600 million at the same point in 2020.

Silver ranked among the best-performing assets last year, gaining nearly 50%. Analysts speculate that its good fortunes will continue this year as favourable policies in the US boost it further.

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However, while silver prices could test $35 to $38 an ounce in the near term, “once the storm calms, prices will come back to normal levels around $26-$27”, Anand Rathi Shares’ commodities analyst Jigar Trivedi predicted.

European stocks opened lower on Thursday following an overnight sell-off on Wall Street that weakened equity markets globally.

The Dow Jones closed down 2% on Wednesday, the index’s biggest single-day fall since October. The slump came shortly after a pessimistic assessment of the US economy from the US Federal Reserve, and amid a market war between activist retail investors and hedge funds in parts of the market. The S&P 500 also lost 2.5%.

Asian stocks slid shortly after the Wall Street sell-off, with Japan’s Nikkei falling 1.5% -- its own steepest drop since October – and South Korea’s Kospi fell 1.7%. Chinese blue-chip stocks also lost 2.7%.

Losses were mirrored in European stocks when markets reopened, with the FTSE 100, CAC 40 and DAX sliding 1.5%, 1% and 1.7% respectively.

Though impactful, the Federal Reserve’s pronouncements on Wednesday were overshadowed by activity around so-called “Reddit Stocks” – equities being boosted by a wave of investors aiming to lift stocks that hedge funds are attempting to short, causing immense losses on Wall Street.

The focal point of the war is GameStop, a high street video game retailer that was targeted by short-sellers and then saw a flurry of trading activity as investors flocked to it. The company’s shares jumped 134% on Wednesday alone and are currently valued at $347, having been down as low as $17 earlier in the year. Cinema chain AMC has also been boosted by the movement’s attentions, gaining 300%.

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“The whole business is seen as a trump for the little traders, the Robinhood account holders who use Reddit to get their financial information,” said David Morrison, market analyst at Trade Nation. “On the other side is the Wall Street players who would happily see GameStop go out of business and people lose their jobs if it brought from a profit.

“Of course, life is never that simple, and the GameStop story is far from over as traders hunt out other heavily-shorted stocks. But it’s a salutary tale of our times and a timely reminder of the dangers that can lurk when shorting individual stocks."

37-year-old US video game retailer GameStop has found itself the epicentre of a fight between established short-sellers and online traders.

GameStop, which focuses on selling physical products, has posted large annual losses as consumers have shifted towards purchasing games digitally. As a high street retailer, it was also greatly impacted by the COVID-19 pandemic, announcing mass closures of its stores in April 2020. Shares in the company dipped as low as £3.25 around this period.

However, a number of ambitious investors have taken on GameStop stock, calling for the company to move its business online and become an active competitor to the likes of Amazon.

A trading firestorm was set off last week as Citron Research founder Andrew Left, who referred to GameStop as a “failing mall-based retailer” in a report earlier this month, took to YouTube to predict that the stock would fall to $20. In response, an unprecedented number of traders on the WallStreetBets subreddit began to aggressively buy up shares in GameStop in an apparent effort to rebuke Left and others looking to short the stock.

GameStop was the most actively-traded US stock last Friday, reaching levels of volatility that forced trading to cease several times during the day. This volatility continued through the new week, reaching more than $300 per share as of Wednesday.

With the potential to make enormous losses, several firms have now closed out of their short positions, including hedge fund Melvin Capital Management. According to reporting form CNN, Andrew Left has also given up on shorting the stock, citing harassment by GameStop backers.

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“As someone who started trading stocks in the late 90s in college, I would always remember watching when the small retail trading groups would get crushed by hedge funds and savvy short-sellers,” Edward Moya, senior market analyst at OANDA, said in a report. “What happened with GameStop’s stock is a reminder of how times are changing.”

The furore around the battle has attracted further investors and pushed the stock yet higher. Tesla and SpaceX CEO Elon Musk has weighed in on the topic, showing apparent support for the buyers in a tweet on Tuesday. It remains to be seen how high GameStop’s stock will rise and how long it will remain strong.

When you decide to look into trading, you might find that there are several options that interest you. While some prefer to stick to stocks and bonds, others might prefer to look into something else, such as binary options trading. Let’s take a closer look at this area, and what you need to know if you wish to trade here.

What are Binary Options?

At their heart, binary options are simple and this is one reason why they are so popular amongst investors. As the name might suggest, they have two possible outcomes. If the investment expires in the money, the trader will receive a fixed return on their investment. Should it expire out of the money, the trader gets nothing.

Unlike stocks which can be very unstable, binary option traders need only worry about the direction of price movement of the option and its expiry time. By choosing the right direction for the price and the perfect expiry time, a skilled trader will be able to pull the deal closed in the money and be able to deliver a reward to them.

What Should You Watch for When Trading?

There are several things that you need to keep an eye out for if you wish to get more involved with binary options. Since they are so simple to trade and manage, some people can get a little carried away and can end up investing more than they can afford to lose. This is still financial trading, and you need to ensure that you are only investing surplus funds that you know you can afford to lose.

You also need to be aware of binary option trading scams. As with other areas of the financial market, there are those out there who wish to wish to try their luck and rip off some unsuspecting trader. If a deal seems just too good to be true, there is a high chance that a scammer is offering it to you.

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Education is Key

As with many other aspects of trading, you need to study how to best trade binary options. Teaching yourself how to best manage the financial market is likely to be a long process, but it is also one that will prove to be crucial as it can help you navigate through many potential problems.

With a good base of knowledge into how multiple markets work, you are in the perfect position to then specialise in certain areas such as binary trading options. Just because stocks might not interest you does not mean that you should neglect an education in them – you never know when they might affect other parts of the market.

Binary trading options are easy and can offer some brilliant returns for those who want to look into them more closely. If you are interested in trading in them, take the time to educate yourself and approach them with a good understanding of what to expect in this particular market area.

Finance Monthly hears from Stuart Lane, CEO of Trade Nation.

2020 was an extraordinary year for traders as the coronavirus spread across the globe, triggering worldwide lockdowns and restrictions and bringing unprecedented volatility to the markets. And while the effects of the pandemic are still far from over, 2021 is set to look very different. Not only do the new vaccination programmes give hope for an eventual return to normality, but we will also see how major political changes play out, such as Brexit and Joe Biden’s first year as President of the United States.

For traders hoping to get ahead of the markets in 2021, here are five key areas for them to keep their eyes on over the next twelve months.

Brexit

With Brexit now pretty much done and dusted, we may see the pound sterling continue to recover from the lows seen last March. However, the big question is whether its strength will hold back possible gains made on the FTSE 100, which has been lagging behind US indices and the German DAX — both of which recently hit record rights. The FTSE, on the other hand, is still more than 12% below the highs experienced in early 2020.

It’s commonly believed that sterling strength weighs heavily on the FTSE due to the fact the majority of the index’s constituents export goods abroad. The higher the value of sterling, the more these goods cost foreign importers, which in turn means less are sold.

Biden Presidency

On the first full trading day of 2021, all five of the major US tech giants (Alphabet, Apple, Amazon, Facebook and Microsoft) — which have effectively driven the extraordinary rally in the US stock indices since the pandemic lows of last March — were down 1.8-2.2%. This is because it looked like the Democrats were about to win control of the Senate, giving the party a clean sweep: Presidency, Senate and House.

As it turned out, the Democrats did win those two vital Senate seats in Georgia. For now, the Republicans have no majority anymore. It also means that Vice President Kamala Harris has the deciding vote whenever there’s a 50:50 Senate split. The Democrats now have the clean sweep they were hoping for, making them much more likely to pursue a radical programme of high spending reforms. This has gone down well with investors who have already rushed to buy stocks, pushing all the major US indices to fresh record highs.

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The Future of Retail

The high street changed beyond recognition in 2020, although it’s well-known that the move away from bricks and mortar to eCommerce was already well-advanced. Now, old-style department stores which were once the foundation of every mid-sized town shopping centre look unlikely to survive. Therefore, a strong online presence is vital for retailers. There will be considerable pressure on the UK government to get involved and save the high street. But will this mean a shake-up on things like business rates and rents, or a lazier approach that simply involved dishing out temporary relief?

As we have seen from early reports on holiday-period spending, food retailers continue to perform well, as do online retailers. But following a boost to high streets in early December, footfall collapsed before Christmas as fresh COVID-19 restrictions were brought in. It’s now reported to be down by 43% in 2020 compared to the previous year. The big question is whether this misfortune will reverse once restrictions are lifted, or will the hope offered by vaccination programmes come too late to save many of our high street favourites?

Technology

When it comes to technology, perhaps the most exciting thing for traders to follow are the advances in medical tech. The mRNA vaccines are a massive development; a new method of vaccine production that will help bring fresh vaccines to market much faster than was previously possible. Also, mRNA vaccines can be adapted quickly and cheaply to address new virus variants, thereby opening up the prospect of vaccines for previously untreatable conditions too.

Elsewhere in tech, Tesla’s stock price soared to a fresh record high in the first week of 2021, making founder Elon Musk the richest person on the planet — overtaking Amazon owner Jeff Bezos. Many analysts continue to insist that Tesla, along with Bitcoin, is in an unsustainable bubble, and one day all those paper-millionaire investors will wake up broke. But for now, the owners of Tesla shares and Bitcoin are laughing the loudest.

‘Ethical’ Stocks

Ethical investment could be one of the biggest buzz areas in 2021. The sector has matured to a great extent, so ethical investment no longer means merely pruning portfolios of defence, tobacco, oil, and mining stocks. Now, there is a large and expanding ‘green’ industry to consider. Last year the UK saw more than $4 billion put into funds claiming to focus on ESG — environmental, social and governance investing. However, not all funds are the same, and careful diligence must be taken to separate those with a genuine will to manage their businesses ethically, and the bandwagon jumpers.

We are already seeing a rise in ethically questionable investments too, water being the most notable. CME Group has recently started offering water futures, and this is also relevant to farmland which is a very big consideration in the US. In fact, these are both areas in which Michael Burry (of The Big Short fame) is now heavily invested. Will more traders now be tempted to follow his lead? Only time will tell.