Hedge funds accustomed to scouring the dark corners of earnings reports in search of companies to bet against are turning to rude online message boards in an effort to stay ahead of the day traders who have started trading. beat them at their own game.
As of early 2020, alternative data provider Quiver Quantitative has been pulling data from the now 4.5 million-strong Reddit forum r / WallStreetBets, identifying the most-talked-about companies and using language processing to determine if sentiment is positive or negative.
Change comes after the hedge fund Capital Melvin was forced this week into a bailout from other investors after an unprecedented assault by individual traders crushed his bet against console retailer GameStop. Others don’t want to fall into the same trap.
“Everyone is looking at Melvin and these other hedge funds that have gone short as a warning,” said James Kardatzke, managing director and co-founder of Quiver Quantitative. “You need to know where retail might be able to explode a position, or where there might be a real increase in interest from retail,” he said.
Over the past few days, numerous institutions and large hedge funds have been in touch to request additional real-time data on the discussions taking place on the Reddit forums, Kardatzke added.
The head of one of the world’s largest hedge fund companies told the Financial Times he plans to start using natural language processing to browse forums such as Reddit to avoid getting caught up in the news. stacks against negative bets. “Reddit is definitely a risk management issue. It’s high on our agenda, ”the person said.
Reddit and other social media platforms now play a more central role in financial markets, said David Lebovitz, global market strategist at JPMorgan Asset Management. “Now you will be able to tap into less traditional sources of information to determine how retail is positioned. It’s a segment of the market that has historically been opaque, and now we’re starting to blink a light. “
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In the past, institutions have relied on other open source data providers to understand the sentiment of retail traders or to bet against amateur strategies. While some of the scratching is done by algorithms, some is still done by humans. ExtractAlpha uses natural language processing to track bloggers’ buy and sell recommendations, and then sells research based on that data to hedge funds.
Other forums on Reddit as well as Twitter are popular with investors, but for institutions, “WallStreetBets is the main focus right now because it’s a great community for investing in trading. retail, and a lot of people see it as a place to move forward that’s really going to influence what retail investors focus on, ”Mr. Kardatzke said.
“The herd has learned to use Wall Street technology against them,” said David Nadig, chief investment officer at ETF Trends. Retail investors – a group that often includes former and current Wall Street professionals – have access to technology, market intelligence and margin to an extent that was not seen two decades ago for the dotcom day-trading boom, said Nadig. “Wall Street is being challenged by retail,” Nadig said.
A Wall Street investor who spoke on condition of anonymity speculated that these platforms would not fall back into obscurity, predicting instead that they could become “fertile ground for targeted business disruption.” especially those perceived as behaving badly. The person warned that institutions that fail to meet certain environmental, social and governance standards, for example, could be caught in the crosshairs.
Forums could also facilitate more insidious behavior, the investor warned. “GameStop is a [small, struggling] company . . . but what about taking a very functional business and bringing it to its knees?